Goodman Hong Kong Logistics Fund Quarterly Report June …/media/Files/Funds/GHKLF/ghklf reporting... · Goodman Hong Kong Logistics Fund Quarterly Report June 2014 ... 17 Case study

5.4% $19.6b

Total return(for the quarter)

Portfolio value Distribution per security(for the quarter)

3.02¢

Q1Goodman Hong Kong Logistics FundQuarterly Report June 2014

2015 Financial Year

Contents+

Figures are as at 30 June 2014 and in Hong Kong currency unless otherwise stated.

5.4%Total return (for the quarter)

$2.39 Current investment value per security (ex-dividend)

3.0yrsWeighted average lease to expiry

$615.4mTotal valuation and disposal gain(for the quarter)

GHKLF is the leading and most diversified provider of modern warehousing and logistics space with a portfolio offering of over 15 million sq ft.

01 Fund Manager’s report04 Analysis of the financial results11 Market commentary15 Portfolio summary16 Portfolio management17 Case study18 Capital transactions19 Financial report (unaudited)25 Glossary27 Corporate directory

Conversion table++ HKD/USD 7.8+ HKD/EUR 10.6+ HKD/SGD 6.2+ HKD/AUD 7.3+ Sq ft/Sqm 10.8

21.0%Fund gearing

$716.3mNet profit after tax (for the quarter)

$19.6bPortfolio value

6.0%Portfolio cap rate

99.8%Portfolio occupancy

3.02¢Distribution per security(for the quarter)

Goodman Hong KongLogistics Fund Quarterly Report June 2014

1

3.0yrsWeighted average lease to expiry

$615.4mTotal valuation and disposal gain(for the quarter) We are delighted to present the quarterly report to 30 June

2014 for Goodman Hong Kong Logistics Fund (GHKLF or the Fund).

Performance The Fund delivered a total return of 5.4% pre-performance fee in the first quarter of the 2015 financial year. This was driven by a capital return of 4.1%, with strong valuation gains recorded as well as the gain on disposal of the remaining floors of Mita Centre. As a result, the current investment value increased to $2.39 (ex-dividend). The Fund’s portfolio also continued to generate sustainable income returns, delivering an income return of 1.3% or 3.02 cents per security for the quarter. Distributions per security have increased 23.2%year on year demonstrating the strong underlying operational performance.

During the quarter, the Fund successfully executed a number of its business plan objectives for FY2015, including its inaugural bond issuance and the divestment of Mita Centre. The divestment of the remaining three floors of Mita Centre for HK$191.8 million was completed on 17 June 2014. This realised a $53.7 million (39%) gain on prevailing book value and concluded the entire strata-sale campaign, delivering an overall profit on prevailing book value of $161 million (56%) and a 131% uplift on the total investment cost for the asset over its seven year holding period.

The Fund completed the first quarter of the new financial year maintaining the portfolio at near full occupancy at 99.8%. A total of 1,360,355 sq ft of new leases and renewals were transacted during the June quarter, of which 196,515 sq ft were for new leases and 1,163,840 sq ft for renewals. Strong reversions were once again achieved, with an average combined annualised uplift of 20.5%.

Five new customers were introduced to the portfolio in the June quarter and leased a total of 89,873 sq ft at Global Gateway, Texaco Centre and ATL, including Raymin Logistics (16,109 sq ft), Viltrans Shipping (12,140 sq ft) and Your Space Tsuen Wan (15,582 sq ft).

Fund Manager’s report“GHKLF successfully completed its Debt Strategy Initiatives, with its inaugural bond issuance significantly strengthening the Fund’s financial position.” Kristoffer Harvey GFM Hong Kong Limited

Fund Manager’s report

2Goodman Hong KongLogistics Fund Quarterly Report June 2014

OM Log is now the Fund’s second largest customer by income following its continued expansion in Western Plaza. It leased an additional 28,700 sq ft during the June quarter and now occupies 727,140 sq ft, equivalent to 55.8% of the building area. Strong rental uplifts continued at ATL with major customers, including Yamato (155,751 sq ft) and Sagawa (70,431 sq ft) renewing their leases for three-year terms to deliver an average annualised uplift of 31.2% on all renewals at ATL during the June quarter.Three properties, representing 26.8% of the Fund’s portfolio, were revalued during the June quarter. The revaluation recorded a combined uplift of $564 million or 11.1% over prevailing book values. The uplifts were predominantly driven by strong increases in passing and market rentals. The capitalisation rate across the three properties compressed on average by 2 basis points, while the overall portfolio capitalisation rate remained relatively unchanged at 5.98%.As at quarter end, the Fund was in the process of acquiring a property that would further enhance its portfolio offering. If successful, the asset would represent around 4 to 5% of the Fund’s combined portfolio base and offers attractive returns through medium-term repositioning opportunities.

Capital managementThe Fund successfully completed its three step Debt Strategy Initiatives during the quarter, with its inaugural bond issuance. Following strong investor interest, the Fund successfully issued a US$400 million 10-year fixed rate coupon bond in the EMTN Reg S market on 19 June 2014. The Bond was 4.5 times oversubscribed, with final pricing at US Treasury’s plus 180bps, which was swapped back in to Hong Kong currency. The bond issuance has met the Fund’s objectives in extending its debt maturity profile and diversifying debt sources. The Fund’s weighted average debt expiry has increased from 3.2 to 6.5 years, while 48.5% of the Fund’s available debt is now placed in the debt capital markets.

Manager’s report continued

As at 30 June 2014, the Fund’s look-through net gearing (including the Fund’s interest in Goodman Interlink) was 21.0%, with interest bearing liabilities of $5,107.7 million. The Fund’s weighted average cost of debt (WACD) was 4.0% for the quarter, which includes both fixed and floating rate interest, with 63% of the Fund’s debt hedged in year one.

MarketThe Hong Kong economy moderated to 2.5% growth y/y in the March quarter of 2014, which was slightly slower than its 2.9% growth in the December quarter. The drag was mainly due to weaker growth in external trade, but has subsequently recovered in early data released for the June quarter. Hong Kong was marred by large public protests on its 1 July national holiday and the future threat of the Occupy Central demonstration. The protests have been focused on the public’s discontent with delays in Hong Kong’s proposed democratic election process and China’s interpretation of Hong Kong’s Basic Law, which remains a threat to Hong Kong’s ongoing economic well-being.

Total tourist arrivals maintained double-digit growth, increasing by 10.9% in the first two months of the June quarter, with mainland tourist arrivals increasing at a higher rate of 13.9% y/y. In contrast, total retail sales declined by 7.1% y/y in the first two months of the June quarter, largely attributed to a decrease in the sale of luxury items, which spiked 12 months earlier. Hong Kong remains at near full employment at the end of May, with the unemployment rate steady at 3.1%, a 16-year low.

The warehouse market continues to be fully occupied, with the vacancy level recorded at just 0.8% at the end of June. Market rentals increased 3% to 4% for the quarter, mainly driven by expansion of outsourcing requirements benefiting third party logistics providers.

Fund Manager’s report continued


3

In the first two months of the June quarter of 2014, the industrial warehouse market recorded 438 transactions, approximately the same as the corresponding period in 2013, while total consideration fell by 43% to $3.54 billion. Although transaction volumes remained at low levels, market sentiment has improved, with capital values reportedly increasing 4.7% for the quarter in the en-bloc institutional market.

OutlookThe Fund has completed an active first quarter for the 2015 financial year, achieving solid financial outperformance and completing two key business plan initiatives, with the Fund’s inaugural Bond issuance and the completion of the strata sale divestment of Mita Centre. This has further improved the Fund’s strong financial position, with the Fund remaining well placed to benefit from strong operational performance and new investment opportunities.

Kristoffer HarveyFund ManagerGFM Hong Kong Limited

Manager’s report continuedFund Manager’s report continued


Fund performanceGoodman Hong Kong Logistics Fund’s performance for the quarter ended 30 June 2014 is detailed below:

Total return analysis

Quarter 30 Jun 14

%

Quarter 31 Mar 14

%

Income return 1.32 1.28

Capital growth – revaluation and others 3.82 5.60

Capital growth – gain/(loss) on disposal of investment properties 0.36 -

Capital growth – fair value change on derivative financial instruments (0.09) 0.12

GHKLF total return (pre-performance fee estimate) 5.41 7.00

Performance fee estimate (0.51) (0.18)

GHKLF total return (post-performance fee estimate) 4.90 6.82

The income return from GHKLF includes distributable income and interest paid by Trust Company (Asia) Limited (TCAL).

GHKLF’s performance fee is an estimate up to the quarter end, subject to final determination and payment in April 2020.

Distribution and interest analysis Investors will receive total cash income of $0.03021 per security (quarter ended 31 March 2014: $0.02774), including the interest from TCAL covering the period from 1 April 2014 to 30 June 2014.

A breakdown of income is as follows:

Quarter 30 Jun 14

$

Quarter 31 Mar 14

$

Interim distribution per security 0.02165 0.01922

Interest on deposit with TCAL (per $0.95 deposited) 0.00856 0.00852

Total cash income per security 0.03021 0.02774

Analysis of the financial results


5

Distributable incomeA detailed breakdown of GHKLF’s NPI for the quarter ended 30 June 2014 is detailed as follows:

Ownership

%

Quarter 30 Jun 14

$M

Quarter 31 Mar 14

$M

Net property income (NPI)

Global Gateway 98 47.53 45.46

Dynamic Cargo Centre 93 19.42 18.84

Tuen Mun Distribution Centre 100 19.83 17.48

Tsuen Wan International Centre 91 11.68 11.67

Goodman Shatin Logistics Centre 72 7.60 7.33

Yuen Long Logistics Centre 100 5.06 4.61

Kader Industrial Centre 100 3.14 2.86

Cargo Consolidation Complex 100 13.85 13.47

Texaco Centre 88 7.45 7.11

Mita Centre 19.5 1.28 1.51

Goodman Kwai Chung Logistics Centre 100 8.96 7.95

Western Plaza 100 22.45 22.20

NPI (wholly owned) 168.25 160.49

Goodman Interlink 50 33.67 32.41

ATL Logistics Centre 25.5 50.03 46.02

Container Terminal 31 50 19.56 23.23

Total NPI 271.51 262.15

1. Container Terminal 3 operating EBITDA reflected as NPI for management account purposes.

Analysis of the financial results


Distribution statement analysisA breakdown of GHKLF’s distributable income for the quarter ended 30 June 2014 is detailed as follows:

Quarter 30 Jun 14

$M

Quarter 31 Mar 14

$M

NPI 271.51 262.15

Fund management fee (22.54) (21.69)

Gain on disposal of investment properties 51.16 –

Other expenses (0.53) (2.33)

Earnings before interest, tax and depreciation 299.60 238.13

CT3 depreciation (8.58) (9.25)

Interest income 0.20 0.20

Senior debt interest expense1 (43.02) (86.50)

Goodman Interlink interest expense (7.23) (7.12)

Subordinated loan interest expense (54.52) (54.00)

Fair value change on derivative financial instruments2 (10.14) -

Net profit before revaluations 176.31 81.46

Property revaluations 564.26 807.32

Net profit after revaluations 740.57 888.78

Tax charge (24.30) (18.76)

Net profit for the period 716.31 870.02

Non cash distributable items

– Gain on disposal of investment properties (51.16) -

– Property revaluations (564.26) (807.32)

– Deferred tax 14.37 10.05

– CT3 depreciation 8.58 9.25

– Write-off unamortized borrowing cost1 - 36.89

– Fair value change on derivative financial instruments2 10.14 -

Distributable income 133.94 118.89

Interest income from deposit with TCAL 52.93 52.74

Total income 186.87 171.63

Shares on issue (000) 6,186,842 6,186,842

Weighted average number of shares for the period (000) 6,186,842 6,186,842

Total income per security ($) 0.03021 0.02774

1. Includes a one time write-off of unamortised upfront fee and legal costs of $36.89 million for the existing senior secured debt and Harrier debt that was refinanced to a new unsecured platform on 28 March 2014.

2. Amount represents fair value change on derivative financial instruments related to cross currency swaps and interest rate cap.

Analysis of the financial results (cont)


7

Current investment valueThe current investment values as at 30 June 2014 are $2.4106 (cum-dividend) and $2.3851 (ex-dividend), pre-performance fee estimate. The investment value at the inception of GHKLF was $0.9873.

30 Jun 14 (cum-dividend)

$

31 Mar 14 (cum-dividend)

$

30 Jun 14 (ex-dividend)

$

31 Mar 14 (ex-dividend)

$

Net asset value (NAV) per security 1.4606 1.3606 1.4351 1.3413

Investment value of TCAL per security 0.9500 0.9500 0.9500 0.9500

Total investment value per security (pre-performance fee estimate)

2.4106 2.3106 2.3851 2.2913

Performance fee accrual estimate 0.0644 0.0526 0.0644 0.0526

Total investment value per security (post-performance fee estimate)

2.3462 2.2580 2.3207 2.2387

The NAV of GHKLF as at 30 June 2014 is calculated as follows:

30 Jun 14$000

31 Mar 14$000

Net assets:

Investment properties (including CT3) 19,626,344 19,190,743

Bank Loans - unsecured (1,200,000) (3,743,500)

Long term note - unsecured (3,101,200) -

Goodman Interlink loan (806,500) (806,000)

Subordinated loan (5,877,500) (5,877,500)

Other assets / (liabilities) 395,441 (346,142)

Total Net Assets 9,036,585 8,417,601

Financed by:

Issued shares 1,681,086 1,681,086

Less: Issue costs (51,289) (51,289)

Hedging reserve (44,180) (42,002)

Retained earnings 7,450,968 6,829,806

NAV 9,036,585 8,417,601

Performance fee estimate (398,576) (325,562)

Total number of securities issued (000) 6,186,842 6,186,842

NAV per share (cum-dividend) ($) 1.4606 1.3606

NAV per share (ex-dividend) ($) (pre-performance fee) 1.4351 1.3413

NAV per share (ex-dividend) ($) (post-performance fee estimate) 1.3707 1.2887


Debt and hedgingDuring the quarter, the Fund successfully completed its three step Debt Strategy Initiatives. The Fund issued its inaugural US$400 million 10-year fixed rate coupon bond (Bond) on 19 June 2014. With a successful book building process, the Fund’s inaugural Bond issuance size was increased to US$400 million and was 4.5 times oversubscribed. Final pricing was US Treasury’s plus 180bps, which was swapped back into Hong Kong currency.

The successful issuance of the Bond diversified the Fund’s debt sources with 48.5% now procured through the bond and extended the Fund’s weighted average debt maturity to 6.5 years. Proceeds from the bond issuance were primarily used to retire the Fund’s shorter-term bank debt, with a portion retained for general corporate purposes.

As at 30 June 2014 and following the Bond issuance, the Fund’s look-through net gearing (including the Fund’s interest in Goodman Interlink) was 21.0%, with interest bearing liabilities of $5,107.7 million. This is below the Fund’s target gearing range of 25% to 35%. Fund gearing has been calculated as drawn bank loan minus unrestricted cash, divided by total assets minus unrestricted cash, to account for any cash being held on balance sheet.

Management continues to monitor interest rate exposures of the Fund and enter into appropriate interest rate hedges to protect against future interest rate volatility. At the end of the June 2014 quarter, the Fund had a weighted average cost of debt (WACD) of 4.0% for the quarter including margins, floating and fixed rate interest. The Fund has 63% of its floating interest rate exposure hedged at the end of the quarter.

Full details of the Fund’s borrowings and the associated interest rate hedges are provided in the notes to the financial statement.

The following graphs represent GHKLF’s interest rate hedging profiles, debt sources, debt maturities and covenant details as at 30 June 2014.

Analysis of the financial results+ (cont)

400250

44

807

3,101

1,000

800

Bank Loan - unsecured (drawn) Bank Loan - unsecured (undrawn) Interlink debt (undrawn)Interlink debt (drawn) Long term note - unsecured

Debt Maturity



9

Capital issuedThe total capital commitments of the Fund as at 30 June 2014 were $7,558. 6 million. The number of investors in the Fund stands at 12. Goodman Group held a 20.0% interest in the Fund as at 30 June 2014.

GHKLF hedging (look-through basis) profile

Debt sources Senior bank loan

Financial covenants

Actual%

Limit%

Gearing ratio 18.5 50.0

Unencumbered assets Ratio 18.5 150.0

Interest cover ratio 529.7 150.0

Goodman InterlinkFinancial covenants

Actual%

Limit%

Loan to valuation ratio 28.4 50.0

Interest coverage ratio 503.1 150.0

3/15 3/16 3/17 3/193/18

Average fixed rate % = 1.94

$M %

Period0

1000

2000

3000

4000

Average fixed rate Forecast interest rateAmount hedged

0

1

2

3

4

Interlink debt (Undrawn)1%

Long termNote -unsecured48%

Bank loan-unsecured(Undrawn)

19%

Bank loan-unsecured

(Drawn)19%

Interlink debt (Drawn)13%


Key statistics

30 Jun 14$M

31 Mar 14$M

Assets

Total investment properties (including CT3) 19,626 19,191

Debt

Bank loans-unsecured 1,200 3,744

Long term notes-unsecured 3,101 -

Goodman Interlink loan 807 806

Subordinated loan 5,878 5,878

Gearing (%)1 21.0 22.8

Number of shares on Issue (000) 6,186,842 6,186,842

Current investment value (ex-dividend) (pre-performance fee) ($) 2.3851 2.2913

Total income per security

Distribution income per $0.05 equity share ($) 0.02165 0.01922

Interest income per $0.95 security deposit with TCAL ($) 0.00856 0.00852

Weighted average share on issue for period (000) 6,186,842 6,186,842

Total income per security ($) 0.03021 0.02774

1 Gearing is on look-through basis (i.e. including interests in joint ventures).



11

EconomyThe Hong Kong economy moderated to 2.5% y/y growth in the March quarter of 2014, which was slightly slower than 2.9% growth recorded in the December quarter. Nevertheless, the government maintained its 3% to 4% growth forecast for the year, backed by a general global economic recovery and the sustained growth in mainland China.

Hong Kong’s foreign trade has seen some recovery in the first two months of the June quarter, with imports and exports growing by 3.1% y/y and 1.7% y/y respectively as compared with the same period in the March quarter. This has been supported by modest growth in mainland China and the advanced Western economies.

Total retail sales declined by 7.1% y/y in the first two months of the June quarter, largely attributed to a decrease in the sale of jewellery, watches, clocks and valuable items, which dropped by 33.0% y/y. These luxury items accounted for nearly 20% of total retail spending. However, it is worth noting that there was a surge in gold-related sales in the June quarter of 2013, which provided a high base of comparison, as a key factor behind the reduction in sales. Despite the slowdown in tourist related retail sales, the segments of the retail market more closely linked to domestic spending remained buoyant. Sales of motor vehicles and parts grew by 14.8% y/y, while sales of clothing, and of food, alcoholic drinks and tobacco increased by 8.3% y/y and 5.9% y/y respectively in the first two months of the June quarter.

Total tourist arrivals maintained its double digit growth, increasing by 10.9% in the first two months of the June quarter, with mainland tourist arrivals increasing at a higher rate of 13.9% y/y, in contrast to the slowdown in luxury retail sales.

The territory remains in a state of near full employment. Hong Kong’s unemployment rate has been steady at 3.1%, a 16-year low. The economy is set to continue expanding at a modest pace over the remainder of the year, which should ensure the jobs market remains tight. The rising number of people in employment, coupled with rising wages, should further support household spending in the territory this year.

Inflation remained steady with a 3.7% y/y increase in May, which is the same pace as in April. It is expected that one of the most important factors holding down prices has been the deceleration in housing costs, with private rents rising by 5.6% y/y in May which is slower growth compared to earlier this year.

While the economy has continued its strong momentum, Hong Kong was marred by large public protests on its 1 July national holiday and the future threat of the Occupy Central demonstration. The protests have been focused on the public’s discontent with delays in Hong Kong’s proposed democratic election process and China’s interpretation regarding Hong Kong’s Basic Law, which remains a threat to Hong Kong’s ongoing economic well-being.

RentCustomer demand for the warehouse property market remains strong, with near full occupancy over the June quarter. With very little space available, landlords continued to push rentals higher. Market rentals increased 3% to 4% for the quarter, mainly supported by strong demand from outsourcing expansion requirements. A Japanese 3PL, Konoike Transport leased 58,500 sq ft in Gateway TS in Tsing Yi after securing a supply chain management mandate from a Japanese fast fashion brand. Hong Kong-based freight forwarder U-Freight (UFL) also leased 39,100 sq ft in Gateway TS while Mitex leased 16,000 sq ft in Hopewell Logistics Centre in Kwai Chung. Tight availability and high asking rentals has also pushed demand into outer locations such as Tuen Mun and Fanling, where rentals were still 10 to 20% below the overall market. Market vacancy for the quarter closed at 0.8%.

Capital valuesIn the first two months of June quarter, the industrial warehouse market recorded 438 transactions, approximately the same as the corresponding period in 2013, while total consideration fell by 43% to $3.54 billion. Although the transaction volume remained at a low level, market sentiment has improved with capital values increasing 4.7% for the quarter and 13.0% y/y for the en-bloc institutional market. The market cap rate for the strata market remained unchanged at 4.3% whilst the cap rate for en-bloc institutional market compressed slightly to 5.6%.

Market commentary


2Q14(HKD psf

pm)

Q-o-Q Change

%

Y-o-Y Change

%

2Q14(HKD

psf)

Q-o-Q Change

Y-o-Y Change

2Q14 Q-o-Q Change

(bps)

Y-o-Y Change

(bps)

10.6 3.1 8.7 2,275 4.7 13.0 5.6 -10 -20

10.5 4.6 14.3 3,004 3.2 8.4 4.3 0 0

Hong Kong Rental Index (Warehouse)

Hong Kong Capital Value Index (Warehouse)

Note: Figures for Q2 (June quarter) 2014 are provisional.Source: Savills Research & Consultancy (Hong Kong), Jones Lang LaSalle (Real Estate Intelligence Service).

Six transactions over $100 million were recorded over the quarter for a total consideration of $1,812 million, double that recorded in the previous quarter. Out of six transactions, four buildings were purchased by investors with the hope of change of use through revitalisation policy. The remaining two properties were purchased by end-users for self-occupation.

Index 2004 Q1=100

230.9

217.3

0

100

200

300

Q10

4Q

204

Q30

4Q

404

Q10

5Q

205

Q30

5Q

405

Q10

6Q

206

Q30

6Q

406

Q10

7Q

207

Q30

7Q

407

Q10

8Q

208

Q30

8Q

408

Q10

9Q

209

Q30

9Q

409

Q11

0Q

210

Q31

0Q

410

Q11

1Q

211

Q31

1Q

411

Q11

2Q

212

Q11

3

Q11

4Q

214

Q41

3Q

313

Q21

3

Q31

2Q

412

Savills (strata) Jones Lang LaSalle (institutional)

Index 2004 Q1=100

Q10

4Q

204

Q30

4Q

404

Q10

5Q

205

Q30

5Q

405

Q10

6Q

206

Q30

6Q

406

Q10

7Q

207

Q30

7Q

407

Q10

8Q

208

Q30

8Q

408

Q10

9Q

209

Q30

9Q

409

Q11

0Q

210

Q31

0Q

410

Q11

1Q

211

Q31

1Q

411

Q11

2Q

212

Q11

3

Q11

4Q

214

Q41

3Q

313

Q21

3

Q31

2Q

412

497.0

293.4

0

100

200

300

400

500

600

Savills (strata) Jones Lang LaSalle (institutional)

Market commentary (cont)

Rents Capital Values Market Yield

JLL (Institutional market)Savills (Strata market)


13

Market YieldHong Kong listed real estate investment trust (REIT) marketThe Hong Kong listed market performed well in the June quarter, with the Hang Seng Index increasing 4.7% from 22,151 to 23,190 as at the end of June 2014.The total market capitalisation of the eight REITs listed on the Hong Kong Stock Exchange (HKSE) increased by 6.1% quarter-on-quarter to US$22.8 billion.

The estimated dividend yield¹ decreased slightly from 6.6% in March 2014 to 6.5% in June 2014, representing a 4.5% spread over the 10-year Hong Kong Government bond rate. The Hong Kong listed REITs were trading at an average discount to net asset value (NAV) of 48.4% as at 30 June 2014, remaining largely unchanged from the previous quarter end.

1 Bloombergestimates.Ratiocalculatedbydividingthedividendpershare(DPS)estimatebasedonthecurrentfiscalyearprovidedbytherequestedfirm/brokerbythecurrentpriceofthesecurity.

Hong Kong listed REIT performance

Discount / Premium to NAV Yield

Source: Bloomberg. Source: Bloomberg.

%Discount/Premium to NAV

Prosperity Link GZI Hui Xian Fortune Sunlight Regal Champion Hong KongAverage

(52) (48)

88

(14) (16)

(35)(26)

(56) (51) (55) (57) (55) (55)(49) (45)(45)

(37)

30 Jun 1431 Mar 14

%Dividend yield

Hong KongAverageChampion

Prosperity

Regal

Sunlight

Fortune

GZI

Link

Hui Xian

4.3

6.5

5.4

5.9

8.1

6.0

8.0

7.5

4.3

6.6

7.8

6.7

6.6

7.2

7.3

6.67.1

5.5

30 Jun 14 31 Mar 14

Price index IPO=100

09/0

5

12/0

5

03/0

6

06/0

6

09/0

6

12/0

6

06/0

7

03/0

7

09/0

7

12/0

7

03/0

8

06/0

8

09/0

8

12/0

8

06/0

9

12/0

9

03/1

0

03/1

4

06/1

4

12/1

3

09/1

3

06/1

3

03/1

3

12/1

2

09/1

2

06/1

2

03/1

2

12/1

1

09/1

1

06/1

1

03/1

1

12/1

0

09/1

0

06/1

0

09/0

9

03/0

9

Link GZI Sunlight Regal Fortune Hui XianChampionProsperity

0

50

100

150

200

250

500

450

400

350

300

Source: Bloomberg.


Hong Kong container ports marketFor the March quarter of 2014, the global port throughput grew by 4.9% y/y, more than double the 2.3% y/y growth registered for the same period last year. The Asia region grew at 5.7%, for which North Asia, Greater China and Southeast Asia grew at 3.5%, 6.7% and 5.2% respectively. Across the globe, North America and the Europe regions maintained steady growth at 2.7% and 2.6%, while the Middle East and India regions surprised the market with strong growth of 6.8%While the figures are positive, they also indicate the changing nature of the global container market with a shift away from China. The top 10 Chinese ports recorded 1Q 2014 y/y growth consistent with global growth at 4.9%, whereas Chinese historical surpassed global growth by a couple of percentage points. This confirms China’s

economic focus is shifting more inwards than outwards.Due to current market performance, Drewry lifted its full year global port volume forecast by 0.5% to 4.9%, a significant advance on the 3.4% growth recorded for 2013.Hong Kong container throughput recorded an increase of 7.3% y/y in the first two months of June quarter, while it grew by 3.5% y/y from January to May 2014. Hong Kong has outperformed its regional rival Shenzhen which registered a decline of 1.2% over the same period. Hong Kong’s growth was helped by the restoration of productivity in Hutchison Group’s HIT terminal which was hampered by labour strikes during April to May 2013, which fortunately did not reoccur in 2014.

Hong Kong container throughput

03/0

5

06/0

5

09/0

5

12/0

5

03/0

6

06/0

6

09/0

6

12/0

6

03/0

7

06/0

7

09/0

7

12/0

7

03/0

8

06/0

8

09/0

8

12/0

8

03/0

9

09/0

9

12/0

9

06/0

9

03/1

0

06/1

0

09/1

0

12/1

0

03/1

1

06/1

1

09/1

1

12/1

1

03/1

2

06/1

2

09/1

2

12/1

2

03/1

3

06/1

3

09/1

3

12/1

3

03/1

4

05/1

4

TEUs y/y%

-25

-20

-15

-10

-5

0

20

15

10

5

Market commentary (cont)


15

Portfolio metrics

Geographic diversification (by value)

Core/enhanced return assets (by value)

Customer by industry (by income)

Portfolio occupancy (by income)1

Top 10 customers (by income)Lease expiry profile (by income)

1 Occupancy rates from launch to 03/10 were calculated by area while from 06/10 onwards, the rate is calculated by income.

Portfolio summary

NewTerritories

West16.4%

Hong KongPort Area36.7%

Hong Kong Prime Port42.4%

New Territories East3.2%

New TerritoriesNorth1.3%

Core100.0%

Manufacturing6.0%

Telecommunicationservices0.2%

Consumer18.8%

Valued-added/Supply chain

17.1%

Freightforwarder

15.3%

Informationtechnology

11.8%

Domesticdistribution25.3%

Others5.5%

%

Laun

ch

06/0

6

09/0

6

12/0

6

03/0

7

06/0

7

09/0

7

12/0

7

03/0

8

09/0

8

12/0

8

06/0

9

12/0

9

03/1

0

03/1

3

03/1

4

06/1

4

12/1

3

09/1

3

06/1

3

12/1

2

09/1

2

06/1

2

03/1

2

12/1

1

09/1

1

06/1

1

03/1

1

12/1

0

09/1

0

06/1

0

09/0

9

03/0

9

06/0

8

95.2

96.596.6

97.798.5

96.2

94.8

97.3

98.7

99.6

98.8 98.3

97.2

95.1

93.593.8 94.6

96.4

97.9 98.5

99.8

99.2

97.298.2

99.499.9 99.7

99.8 99.899.9

99.3

92.792.0

99.0

8.9

23.2

29.9

11.6

17.6

8.8

%

Years to expiry<1 1 − 2 2 − 3 3 − 4 4 − 5 > 5

DHL

OM Log

Equinix

WPG Electronics

JSI Logistics

PCCW

Dairy Farm

Yusen Logistics

LF Logistics

Santa Fe Transport International

%

6.8

4.5

4.4

3.8

3.0

3.0

2.7

2.4

2.3

2.3


The portfolio continued its strong performance in the June quarter with low vacancy and strong rental reversions on leasing completed during the quarter.

Portfolio occupancy decreased slightly from the March quarter from 99.9% to 99.8%, due to the completion of the Mita Centre divestment in June that was 100% occupied. The Hong Kong warehouse market continues to operate at close to full occupancy and as such, there have been relatively few customer movements during the quarter.

As of 30 June 2014, there was no vacant warehouse space in the portfolio, with the only vacancy of 36,619 sq ft located in the office portion of the ATL Logistics Centre. Management has appointed CBRE as the lead marketing agent for the ATL office space premises to source potential customers.

A total of 1,360,355 sq ft of new leases and renewals were transacted during the June quarter, representing 8.9% of the GLA in the portfolio. 196,515 sq ft of new leases were signed (14.4% of the total transacted area for the quarter), while 1,163,840 sq ft (85.6%) of leases were renewed at an average uplift of 61.3% (20.9% annualised) over passing rents. The average retention rate for the quarter was 84.7%.

Five new customers were introduced to the portfolio in the June quarter and leased a total of 89,873 sq ft in Global Gateway, Texaco Centre and ATL. Transpole Logistics (38,009 sq ft), Raymin Logistics (16,109 sq ft), and Gamma Logistics (8,033 sq ft) all signed three-year leases at ATL at an average uplift of 46.5% (18.5% annualised), while Viltrans Shipping (12,140 sq ft) and Your Space Tsuen Wan (15,582 sq ft), a newcomer to the Hong Kong self-storage business, signed new leases at Global Gateway and Texaco Centre respectively.

OM Log, the Fund’s second largest customer by income, continued to expand in Western Plaza, leasing an additional 28,700 sq ft during the June quarter. OM Log now occupy 727,140 sq ft in Western Plaza, equivalent to 55.8% of the building area. Geodis Wilson, an anchor tenant at Tuen Mun Distribution Centre, leased an additional floor in Block 1 of the building (32,101 sq ft), increasing their footprint in the building to 206,065 sq ft. Geodis Wilson is also in advanced discussions to lease a floor in Dynamic Cargo Centre (32,776 sq ft), where they also have an existing lease of one floor (32,776 sq ft).

Other significant renewals during the quarter included Schenker’s renewal of 206,802 sq ft at Tuen Mun Distribution Centre and Santa Fe’s renewal of 97,968 sq ft at Yuen Long Logistics Centre. JSI Logistics, the Fund’s sixth-largest customer by income, also renewed 62,608 sq ft in Tsuen Wan International Centre and 16,660 sq ft in Global Gateway. Strong rental uplifts continue to be achieved at ATL with major customers, including Yamato (155,751 sq ft) and Sagawa (70,431 sq ft) who both renewed their leases for three-year terms. The leases of said customers were renewed at an average uplift of 61.5% over passing rents (20.1% annualised).

Operationally CT3 performed well, recording a 3.8% increase in volume over the previous quarter with 252,260 TEUs. Operating EBITDA for the June quarter was $19.6 million (50% interest), slightly lower than the previous quarter due to reversal of provision at the end FY2014. Hong Kong container volumes are improving from 2013 and are expected to moderate over the remainder of 2014.

The portfolio’s top five lease expiries in the coming 12 months account for only 3.7% of portfolio income.

Portfolio management


17

Case studyMita Centre – Strata Sale DivestmentThe Fund acquired 45.6% of the undivided shares in Mita Centre in 2007 for HK$190.8 mil (or HK$996/sq ft). This portion consisted of seven floors and 16 car parking spaces, which was 100% leased to Kyocera Document Technology Company (H.K.) Limited who are a Japanese producer of cameras, copiers, printers, mobile phones, ceramic goods, electronics and semi-conductor components.

The acquisition of the 2007 portion was completed with the objective of acquiring additional portions to a stage where the Fund was a majority owner of the building, and would provide the opportunity for the asset to be repositioned in line with the Fund’s objectives.

Following a review and subsequent downsize of their Hong Kong operations, Kyocera vacated four floors when their lease expired in 2010. Management implemented an extensive repositioning and marketing campaign of the vacant premises to attract new customers, which resulted in new leases to a Hong Kong headquartered express company, Bel International Logistics, and to a leading retailer of fashion, accessories and homewares, Club 21. These leases provided a diversified customer base with companies that were experiencing rapid growth in Hong Kong due to increasing domestic consumption. The lease to Bel International Logistics at Mita Centre also provided a platform for a successful customer relationship which extended to Goodman Interlink where they pre-committed to the ground floor unit (26,010 sq ft) for the premises to serve as one of their major Hong Kong distribution hubs.

Acquisition of further portions in Mita Centre and a subsequent majority ownership of the building did not eventuate due to market movements in the strata investment market. As such, Management reassessed the asset strategy and changed strategy from a consolidation target to a strata title divestment strategy. Management identified that due to the low interest rate environment, investors in the sub US$25 million range (i.e. high net worth individuals) were paying large premiums to enbloc and majority portion transactions and would allow the Fund to exit at a significant premium to book value and a sale in one line.

With the strategy for strata title sale of individual floors being adopted, Management further positioned the asset for strata sale, renewing Kyocera’s lease over three floors (82,110 sq ft) in 2012 to three separate leases on a floor by floor basis. This allowed the Fund to sell the floors on an individual floor basis. The renewal also achieved a strong rental reversion uplift of 22% over passing rent which presented the opportunity for investors to acquire the floors with an attractive yield in place.

The strata-title floor by floor sale campaign was launched in October 2012, and completed successfully in June 2014 with five individual sales providing total net sales proceeds of $450 million ($2,349/ sq ft). The floors were sold on an average passing yield of 3.7% and average market yield of 4.5%. This also represented a profit on book value of $161 million and net profit on total investment costs of $255 million, which provides the Fund with the opportunity to recycle capital for other opportunities.

Mita Centre


The disposal of the entire 3/F, 4/F, 5/F and seven car parking spaces at Mita Centre were successfully completed on 17 June 2014. Gross sale proceeds were $191.8 million, representing a 39% premium to prevailing book value. This completed the strata sale divestment of Mita Centre, which realised a 56% premium to prevailing book value and a 131% premium to total investment cost by the Fund over the seven year holding period. The transaction is a favourable result for the Fund in light of the Government’s cooling measures on the property market.

Capital transactions

Property Sale price ($M)

Prevailing book value

($M)

Profit on book value

($M) Actual completion date

Mita Centre (16/F and two parking spaces) 63.8 34.7 29.1 Completed on 15 March 2013

Mita Centre (12/F and two parking spaces) 63.8 34.7 29.1 Completed on 14 May 2013

Mita Centre (13/F and two parking spaces) 63.8 34.7 29.1 Completed on 14 May 2013

Mita Centre (7/F and three parking spaces) 66.9 46.6 20.3 Completed on 28 August 2013

Mita Centre (3/F, 4/F, 5/F and seven parking spaces) 191.8 138.1 53.7 Completed on 17 June 2014

Total 450.1 288.8 161.3

Mita Centre strata sale campaign

Financial report (unaudited)

Contents+20 Income statement (unaudited)21 Balance sheet (unaudited)22 Notes to the financial statements (unaudited)


Income statement (unaudited)

Note 1 Apr 14to 30 Jun 14

$000

Net property income (excluding Harrier, Goodman Interlink) 1 168,196

Fund management fee (19,342)

Gain on disposal of investment properties 51,157

Other expenses from operations (468)

Profit before interest, revaluation and taxation 199,543

Interest income from bank deposit 198

Interest income from joint ventures 9,253

Senior debt interest expense nterest expense (43,019)

Subordinated debt interest expense (54,523)

Fair value change on derivative financial instruments (10,138)

Net profit before revaluations and taxation 101,314

Property revaluations 2 563,537

Share of profits of joint ventures 7 63,242

Taxation 3 (11,820)

Net profit after tax 716,273

Retained/not available for distribution

Gain on disposal of investment properties (51,157)

Property revaluations (563,537)

Deferred taxation 11,820

Fair value change on derivative financial instruments 10,138

Share of revaluations of joint ventures 7 (728)

Share of deferred taxation of joint ventures 7 2,556

Share of depreciation of joint ventures 8,578

Net profit available for distribution 133,943

Interest income on deposit with TCAL 52,931

Total cash income to investors 186,874

Cash return (post-performance fee) (HK cents) 3.02

Management expense ratio (annualised) (%) 0.46

Financial statements in this section have been prepared in accordance to Hong Kong Accounting Standards (HKAS) and financial results of joint ventures have been accounted for by using the equity accounting method.

20


Balance sheet (unaudited)

Note 30 Jun 14$000

Non‑current assetsInvestment properties 12,231,146Investments in joint ventures 7 5,754,598Amount due from a joint venture 618,562Derivative financial instruments 10,042Total non‑current assets 18,614,348Current assetsDebtors, prepayments and deposits 205,757Tax prepaid 2,400Cash at bank 902,098Total current assets 1,110,255Total assets 19,724,603Current liabilitiesCreditors and accruals 121,173Rental deposits 192,029Tax payable 1,418Total current liabilities 314,620Non‑current liabilitiesLong term borrowings 4 10,114,037Derivative financial instruments 69,343Deferred tax liabilities 190,018Total non‑current liabilities 10,373,398Total liabilities 10,688,018Net assets 9,036,585EquityContributed equity 1,629,797Hedging reserves (44,180)Retained earnings– Distributable 157,721– Non-distributable/retained 7,293,247Total equity 9,036,585Number of shares (000) 6,186,842NAV per share ($) 1.4606Gearing (%) 21.0

Financial statements in this section have been prepared in accordance to Hong Kong Accounting Standards (HKAS) and financial results of jointly ventures have been accounted for by using the equity accounting method.

21


Notes to the financial statements (unaudited)

1 NPINPI comprises rental and management fees charged to customers less property expenses.

NPI for the Fund consists of the following:

1 Apr 14to 30 Jun 14

$000

Wholly owned entities 168,251

Liberty Bell Investments (55)

NPI (wholly-owned) 168,196

Joint ventures:

– Goodman Interlink 33,669

– ATL 50,082

– CT3 19,564

Total NPI 271,511

2 Property revaluationsUnder the Hong Kong Financial Reporting Standards (HKFRS), revaluation gains and losses relating to investment properties are recognised in the income statement.

3 TaxationHong Kong profit tax is provided for at the prevailing rate on the estimated assessable profits for the year, less available tax for losses brought forward.Deferred tax on depreciation allowances is provided in accordance with HKFRS. The amount shown in the income statement comprises the following:

1 Apr 14to 30 Jun 14

$000

Current taxation -

Deferred taxation 11,820

Total 11,820

22


4 Long term borrowingsA summary of long term borrowings as at 30 June 2014 is as follows:

Note $000

Bank loan - unsecured (i) 1,200,000

Long term note - unsecured (ii) 3,101,200

Subordinated loan 5,877,500

Less: unamortised transaction costs (64,663)

Total 10,114,037

(i) Details of the senior unsecured bank loan facilities are as follows:

Bank loan facilities Term Maturity date Facility$M

Amount drawn$M

3 year tenure Revolving credit facility Mar 17 250 -

4 year tenure Term loan Mar 18 700 700

Revolving credit facility Mar 18 1,100 100

5 year tenure Term loan Mar 19 400 400

Total 2,450 1,200

(iii) Details of the Goodman Interlink debt facility (100%) are as follows:

Interlink debt facilities

Term Maturity date Facility$M

Amount drawn$M

Tranche A Term loan Oct 15 1,600 1,600

Tranche B Revolving credit facility Oct 15 100 13

Total 1,700 1,613

Goodman Interlink debt is included in “Interest’s in joint ventures”, as this is a liability of Goodman Interlink, a joint venture company. As at 30 June 2014, GHKLF held a 50% interest in Goodman Interlink.

Notes to the financial statements (unaudited) (Cont)

The US$ fixed rate bond of US$400 million has been issued on 19 June 2014 and under the cross currency swap entered with four major banks, the fixed rate bond has been converted into HK$ floating rate liability of HK$3,101.2 million maturing in June 2024.

(ii)

23


5 Interest rate hedging profileThe following table represents GHKLF’s current interest rate hedging profile:

Jun 15 Jun 16 Jun 17 Jun 18 Jun 19

Total forecast debt ($M) 5,108 5,108 5,108 5,108 5,108

Amount hedged ($M) 3,321 2,744 1,963 845 400

Hedged (%) 65 54 38 17 8

Maximum hedge ratio (%) 100 90 90 75 70

Minimum hedge ratio (%) 60 50 50 35 20

Benchmark (%) 80 70 70 55 45

Weighted average fixed rate (hedged rate, excluding margin) (%) 2.34 1.59 1.63 1.97 2.50

Forecast floating rate (excluding margin) (%) 1.05 1.96 2.64 3.04 3.26

Effective rate (excluding margin) (%) 1.50 1.24 1.78 2.52 2.97

6 NAV

30 Jun 14

NAV (cum-dividend) ($000) 9,036,585

NAV (ex-dividend) ($000) 8,878,864

NAV per share (cum-dividend) ($) 1.4606

NAV per share (ex-dividend) ($) 1.4351

7 Investments in joint ventures

ATL CT3 Goodman Interlink

Total

Share of profits 42,391 8,430 12,421 63,242

Investments in joint ventures 3,454,515 889,646 1,410,437 5,754,598

Notes to the financial statements (unaudited) (cont)

24


ATL ATL Logistics Centre.

bps Basis points.

Bond US$400 million 10-year fixed rate coupon

Cap rate Capitalisation rate.

CCC Cargo Consolidation Complex.

CIV Current investment value is defined as the sum of net asset value and the investment amount with TCAL per security.

Colliers Colliers International.

CT3 Container Terminal 3.

DCM Debt Capital Markets.

Debt Strategy InitiativesThree step process to refinance the Fund’s debt platform to an unsecured arrangement, obtain Standard & Poor’s rating and access to the Debt Capital Market for alternate funding sources.

DPS Distribution per security.

DTZ DTZ Deheham Tie Leung Limited.

GAL or Goodman Asia Goodman Asia Limited.

GBP General Building Plans.

GDP Gross Domestic Product.

GHKLF or Fund Goodman Hong Kong Logistics Fund.

GLA Gross lettable area.

Goodman or Goodman Groupor JV Partners

Goodman Limited, Goodman Industrial Trust and Goodman Logistics (Hong Kong) Limited, trading as Goodman Group and, where the context requires, their controlled entities.

HIBOR Hong Kong Inter-Bank Offered Rate.

HOA Heads of Agreement.

IC Investors Committee.

IPO Initial Public Offering.

IRR Internal rate of return.

JLL Jones Lang LaSalle Limited.

LTV Loan-to-value.

MLP Master Layout Plans.

NAV Net asset value.

NPI Net property income.

Project Harrier or Harrier The acquisition of a controlling interest in ATL Logistics Centre andContainer Terminal Number 3.

REIT Real estate investment trust.

Savills Savills Research & Consultancy (Hong Kong).

Glossary

25


Sq ft Square feet.

Sqm Square meter.

TEU Twenty-foot equivalent unit.

TCAL The Trust Company (Asia) Limited

WACD Weighted average cost of debt.

WADE Weighted average debt expiry.

WALE Weighted average lease expiry.

26


Corporate directoryFundGoodman Hong Kong Logistics FundRegistered office 89 Nexus Way Camana Bay Grand CaymanKY1-9007 Cayman Islands

ManagerGFM Hong Kong Limited Suite 2008 Three Pacific Place 1 Queen’s Road East Hong KongTelephone +852 2249 3100 Facsimile +852 2525 2070 Email [email protected] Website www.goodman.com

DirectorsGregory Goodman Nick Kurtis Philip Pearce Kristoffer Harvey

This Quarterly Report has been prepared by GFM Hong Kong Limited as reporting manager of Goodman Hong Kong Logistics Fund. The information in this Quarterly Report is general information only. It is not intended as investment or professional advice and must not be relied upon as such. You should obtain independent professional advice prior to making any decision relating to your investment or financial needs. Past performance is no indication of future performance. This Quarterly Report is not an offer or invitation for subscription or purchase of securities or other financial products. It does not constitute an offer of securities for sale in the United States. Securities may not be offered or sold in the United States unless they are registered under the US Securities Act of 1933 or an exception from registration is available. All values are expressed in Hong Kong currency unless otherwise stated. July 2014.

27

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Goodman Hong Kong Logistics Fund Quarterly Report June …/media/Files/Funds/GHKLF/ghklf reporting... · Goodman Hong Kong Logistics Fund Quarterly Report June 2014 ... 17 Case study