Goodman Hong Kong Logistics Fund Quarterly Report .../media/Files/Funds/GHKLF/ghklf reporting... · Goodman Hong Kong Logistics Fund Quarterly Report September 2014 ... 18 Case study

2015

Q2

Total return(for the quarter)

Portfolio value Distribution per security(for the quarter)

Goodman Hong Kong Logistics FundQuarterly Report September 2014

3.9% $21.1b 3.07¢

Contents+

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

3.9%Total return (for the quarter)

$2.45 Current investment value per security (ex-dividend)

2.8yrsWeighted average lease to expiry

$396.7mTotal valuation(for the quarter)

A 9.5% Total return has been delivered for the first half of the 2015 financial year, with GHKLF on track to deliver Business Plan outperformance for the full year.

01 Fund Manager’s report05 Analysis of the financial results11 Market commentary15 Portfolio summary16 Portfolio management18 Case study20 Capital transactions21 Financial report (unaudited)27 Glossary28 Corporate directory

Conversion table++ HKD/USD 7.8+ HKD/EUR 9.8+ HKD/SGD 6.1+ HKD/AUD 6.8+ Sq ft/Sqm 10.8

24.1%Fund gearing

$509.0mNet profit after tax (for the quarter)

$21.1bPortfolio value

6.0%Portfolio cap rate

99.9%Portfolio occupancy

3.07¢Distribution per security(for the quarter)

Goodman Hong KongLogistics Fund Quarterly Report September 2014

1

We are delighted to present the quarterly report to 30 September 2014 for Goodman Hong Kong Logistics Fund (GHKLF or the Fund).

Performance The Fund delivered a total return of 3.9% pre-performance fee in the second quarter of the 2015 financial year. This was primarily driven by a capital return of 2.6% through continued strong valuation gains in the portfolio. The current investment value increased to close at $2.45 (ex-dividend) for the quarter. The Fund’s portfolio generated an income return of 1.3%, with income growth keeping pace with valuation growth. Distributions per security were 3.07 cents for the quarter, which have now increased by 18.1% y/y.

The Fund completed the second quarter with the portfolio near full occupancy at 99.9%. Leasing success was achieved at the remaining ATL office space which included space that had been vacant since 2002. 13,147 sq ft of office space at ATL was leased to three customers, while reasonable enquiry has been observed over the balance of the space.

A total of 796,469 sq ft of new leases and renewals were transacted during the quarter, representing 5.1% of the GLA in the portfolio. New leases signed represented 14.7% (117,203 sq ft) of the total transacted area for the quarter, while renewals accounted for 85.3% (679,266 sq ft) of leases and achieved an average uplift of 62.8% (19.5% annualized) over passing rents. Key renewals for the quarter included DHL renewing 112,914 sq ft at Tuen Mun Distribution Centre and ATL and Oxford University Press renewing 85,328 sq ft at Dynamic Cargo Centre.

Geodis Wilson, an anchor customer at Tuen Mun Distribution, continued to expand by leasing an additional floor (32,776 sq ft) at Dynamic Cargo Centre. This is the second consecutive quarter that Geodis Wilson has taken expansion space in the portfolio and they are in discussions to lease an additional half-floor in Dynamic Cargo Centre. Geodis Wilson is currently the 12th largest customer in the portfolio, however, upon commencement of the new lease in Dynamic Cargo Centre, Geodis Wilson will occupy 303,718 sq ft and will become a top-10 customer.

Fund Manager’s report“GHKLF successfully acquired a new HK$1.0 billion investment that is expected to enhanced portfolio returns over the medium term” Kristoffer Harvey GFM Hong Kong Limited

Fund Manager’s report

2.8yrsWeighted average lease to expiry

$396.7mTotal valuation(for the quarter)

2Goodman Hong KongLogistics Fund Quarterly Report September 2014

Five properties, representing 22.4% of the Fund’s portfolio, were revalued during the September quarter. The revaluation recorded a combined uplift of $397 million or 8.5% over prevailing book values. The uplifts were predominantly driven by strong increases in passing and market rentals. Capitalisation rates across the five properties remained generally unchanged, as did the overall portfolio capitalisation rate which remained stable at 6.0%.

During the quarter the Fund successfully acquired a new enhanced return investment known as Goodman Tsuen Wan West or Project Moon. The property was acquired for a total consideration of HK$1.02 billion and comprises 467,616 sq ft of existing GLA on a site area of 118,268 sq ft. The property is currently under-rented and offers enhanced return opportunities through repositioning or medium term redevelopment. The acquisition enlarges GHKLF’s portfolio offering and will allow GHKLF to gain enhanced return exposure over the medium term.

GHKLF participated in the 2014 Global Real Estate Sustainability Benchmark (GRESB) annual survey. The Fund was awarded a Regional Sector Leader for industrial in East Asia and demonstrates Goodman’s continued focus on sustainability in the development and management of its assets.

Capital managementAs at 30 September 2014, the Fund’s look-through net gearing (including the Fund’s interest in Goodman Interlink) was 24.1%, with interest bearing liabilities of $5,199.7 million. Gearing and interest bearing liabilities have increased slightly following GHKLF’s acquisition of Goodman Tsuen Wan West (Project Moon), though still remains below the bottom end of the Fund’s targeted gearing range. Following the acquisition the Fund continues to hold significant net liquidity of approximately HK$1.0 billion.

Manager’s report continued

The Fund’s weighted average debt expiry is 6.2 years. The Fund’s weighted average cost of debt (WACD) was 3.9% after the bond issuance which includes both fixed and floating rate interest. A number of new interest rate hedging arrangements were entered into during the quarter with 76% of the Fund’s debt now hedged as at 30 September 2014.

MarketHong Kong recorded a 1.8% year-on-year (y/y) growth in the economy for the June quarter of 2014, compared with the 2.6% increase in the previous quarter. Nonetheless, the government forecast the economy in 2014 to grow by 2% to 3%. Import and export trades experienced a recovery with an increase of 2.3% y/y in the June quarter from the 0.7% y/y fall in the previous quarter. Hong Kong’s imports and exports have seen further improvements in the first two months of the September quarter, growing by 5.4% y/y and 6.6% y/y respectively. This has been largely supported by the increasing growth of exports to most major destinations in Asia

Total retail sales grew by 0.05% in the first two months of the September quarter, improving from a 7.1% y/y decline in the first two months of the June quarter. In August, retail sales recorded 3.4% growth y/y ending the six consecutive months of decline. Despite the decline in spending by mainland Chinese tourists on luxury items, total Chinese tourist arrivals maintained a solid double digit growth, increasing by 14.4% y/y in the first two months of the September quarter, while total tourist arrivals grew by 11.7% y/y over the same period. The unemployment rate remained at record low levels of 3.3% in August.

As flagged last quarter, pro-democracy demonstrations have since taken place in Hong Kong due to discontent with China’s proposed democratic election terms and China’s interpretation of Hong Kong’s Basic Law.

Fund Manager’s report continued


3

Known as “Occupy Central”, protests commenced on 28th of September blocking major streets in parts of Admiralty, Central, Mongkok and Causeway Bay. At the time of publishing this report the demonstration and blockages were continuing. While no direct impacts to the portfolio has been observed, Management is focused on the potential indirect impacts that may arise should Mainland China visitor arrivals and retail sales decline over the medium term as a result of the protests. Although the protests have placed some uncertainties to the Hong Kong economy for the rest of the year, the economy currently remains fundamentally strong.

The warehouse property market remains tight, with market vacancy closing at 0.9% at the end of the September quarter. Market rentals for the quarter recorded growth of 3.7% q/q.

The industrial / warehouse market recorded 794 transactions for a total consideration of $7.1 billion in the September quarter, up by 19% and 20% respectively compared to the June quarter. With the improvement in transaction volumes, capital values increased by 5.8% for the quarter and 15.6% y/y for the en-bloc / institutional market.

OutlookThe Fund continues to deliver strong returns, with the Fund’s market leading portfolio delivering sustained high occupancy and strong underlying rental growth. Despite this Management remains focused on the outlook and will closely monitor the current political unrest in Hong Kong and potential impacts to retail sales and the Fund’s portfolio. Management will continue to engage portfolio management and capital management strategies to mitigate any impacts that may result and remains confident in the long term outlook for GHKLF.

Kristoffer HarveyFund ManagerGFM Hong Kong Limited

Manager’s report continuedFund Manager’s report continued

ATL Logistic Centre



5

Fund performanceGoodman Hong Kong Logistics Fund’s (GHKLF or Fund) performance for the quarter ended 30 September 2014 is detailed below:

Total return analysis

Quarter 30 Sep 14

%

Quarter 30 Jun 14

%

Income return 1.29 1.32

Capital growth – revaluation and others 2.51 3.82

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

Capital growth – fair value change on derivative financial instruments 0.13 (0.09)

GHKLF total return (pre-performance fee estimate) 3.93 5.41

Performance fee estimate (0.37) (0.51)

GHKLF total return (post-performance fee estimate) 3.56 4.90

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 $0.03065 per security (quarter ended 30 June 2014: $0.03021), including the interest from TCAL covering the period from 1 July 2014 to 30 September 2014.

A breakdown of income is as follows:

Quarter 30 Sep 14

$

Quarter 30 Jun 14

$

Interim distribution per security 0.02199 0.02165

Interest on deposit with TCAL (per $0.95 deposited) 0.00866 0.00856

Total cash income per security 0.03065 0.03021

Analysis of the financial results


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

Quarter 30 Sep 14

$M

Quarter 30 Jun 14

$M

NPI 278.35 271.51

Fund management fee (23.98) (22.54)

Gain on disposal of investment properties – 51.16

Other expenses (0.50) (0.53)

Earnings before interest, tax and depreciation 253.87 299.60

CT3 depreciation (8.57) (8.58)

Interest income 0.16 0.20

Senior debt interest expense (44.29) (43.02)

Goodman Interlink interest expense (7.31) (7.23)

Subordinated loan interest expense (55.20) (54.52)

Fair value change on derivative financial instruments1 1.66 (10.14)

Net profit before revaluations 140.32 176.13

Property revaluations 396.68 564.26

Net profit after revaluations 537.00 740.57

Tax charge (28.00) (24.30)

Net profit for the period 509.00 716.27

Non cash distributable items

– Gain on disposal of investment properties – (51.16)

– Property revaluations (396.68) (564.26)

– Deferred tax 17.62 14.37

– CT3 depreciation 8.57 8.58

– Fair value change on derivative financial instruments1 (2.46) 10.14

Distributable income 136.05 133.94

Interest income from deposit with TCAL 53.58 52.93

Total income 189.63 186.87

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 ($) 0.03065 0.03021

1. 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 September 2014 are $2.4701 (cum-dividend) and $2.4481 (ex-dividend), pre performance fee estimate. The investment value at the inception of GHKLF was $0.9873.

30 Sep 14 (cum-dividend)

$

30 Jun 14 (cum-dividend)

$

30 Sep 14 (ex-dividend)

$

30 Jun 14 (ex-dividend)

$

Net asset value (NAV) per security 1.5201 1.4606 1.4981 1.4351

Investment value of TCAL per security 0.9500 0.9500 0.9500 0.9500

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

2.4701 2.4106 2.4481 2.3851

Performance fee accrual estimate 0.0733 0.0644 0.0733 0.0644

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

2.3968 2.3462 2.3748 2.3207

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

30 Sep 14$000

30 Jun 14$000

Net assets:

Investment properties (including CT3) 21,093,744 19,626,344

Bank loans - unsecured (1,297,000) (1,200,000)

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

Goodman Interlink loan (801,500) (806,500)

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

Other assets / (liabilities) (611,866) 395,441

Total Net Assets 9,404,678 9,036,585

Financed by:

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

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

Hedging reserve (27,369) (44,180)

Retained earnings 7,802,250 7,450,968

NAV 9,404,678 9,036,585

Performance fee estimate (453,406) (398,576)

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

NAV per share (cum-dividend) ($) 1.5201 1.4606

NAV per share (ex-dividend) ($) (pre-performance fee) 1.4981 1.4351

NAV per share (ex-dividend) ($) (post-performance fee estimate) 1.4248 1.3707


Debt and hedgingAs at 30 September 2014, the Fund’s look-through net gearing (including the Fund’s interest in Goodman Interlink) was 24.1% with interest bearing liabilities of $5,199.7 million. This increased slightly following the Fund’s acquisition of Goodman Tsuen Wan West (Project Moon), though still remains 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. The Fund holds net available liquidity of approximately HK$1.0 billion.

Management continues to monitor interest rate exposures of the Fund and enter into appropriate interest rate hedges to protect against future interest rate volatility. During the quarter a number of interest rate hedges were entered into for a notional amount of HK$700 million. The Fund has 76% of its floating interest rate exposure hedged at the end of the quarter. At the end of the September 2014 quarter, the Fund had a weighted average cost of debt (WACD) of 3.9% including margins, floating and fixed rate interest. The Fund’s debt sources are diversified with 48.5% now procured through the Bond and the Fund’s weighted average debt maturity is 6.2 years.

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 September 2014.

400250

49

802

3,101

903

897

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

Debt Maturity



9

Capital issued

The total capital commitments of the Fund as at 30 September 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 September 2014.

GHKLF hedging (look-through basis) profile

Debt sources Senior bank loan

Financial covenants

Actual%

Limit%

Gearing ratio 23.1 <50.0

Unencumbered assets Ratio 23.1 <50.0

Interest cover ratio 578.1 >150.0

Priority debt ratio 0 <15.0

Goodman Interlink

Financial covenants

Actual%

Limit%

Loan to valuation ratio 28.2 <50.0

Interest coverage ratio 497.8 >150.0

9/15 9/16 9/17 9/199/18

Average fixed rate % = 1.98

$M

Period0

1,000

2,000

3,000

4,000

Average fixed rate Forecast interest rateAmount hedged

0

1

2

3

4

Interlink debt (Undrawn)1%

Long termNote -unsecured48%

Bank loan-unsecured(Undrawn)

18%

Bank loan-unsecured

(Drawn)20%

Interlink debt (Drawn)13%


Key statistics

30 Sep 14$M

30 Jun 14$M

Assets

Total investment properties (including CT3) 21,094 19,626

Debt

Bank loans-unsecured 1,297 1,200

Long term notes-unsecured 3,101 3,101

Goodman Interlink loan 802 807

Subordinated loan 5,878 5,878

Gearing (%)1 24.1% 21.0%

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

Current investment value (ex-dividend) (pre-performance fee) ($) 2.4481 2.3851

Total income per security

Distribution income per $0.05 equity share ($) 0.02199 0.02165

Interest income per $0.95 security deposit with TCAL ($) 0.00866 0.00856

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

Total income per security ($) 0.03065 0.03021

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



11

EconomyHong Kong recorded 1.8% year-on-year (y/y) growth in the economy for the June quarter of 2014, compared with the 2.6% increase in the previous quarter. Nonetheless, the government forecast the economy in 2014 to grow by 2% to 3%. The service sectors contributed a 2.1% y/y growth during the period, slightly slower than the 2.2% increase in the March quarter. This was partly attributed to a 6.0% y/y decrease in the wholesale and retail trade sectors, compared with a 4.1% growth the previous quarter. However, the import and export trades have seen recovery with an increase of 2.3% y/y from the 0.7% y/y fall in the March quarter.

Hong Kong’s imports and exports have seen further improvement in the first two months of the September quarter, growing by 5.4% y/y and 6.6% y/y respectively. This has been largely supported by the increasing growth of exports to most major destinations in Asia. In particular, exports to China and India increased by 5.2% y/y and 33.8% y/y respectively, which accounted for 43.0% and 10.7% respectively of the total uplifts in the exports over the same period.

Total retail sales grew by 0.05% in the first two months of the September quarter, improving from a 7.1% y/y decline in the first two months of the June quarter. In August, retail sales recorded a 3.4% growth y/y ending the six consecutive months of declines. Retail sales of luxury items such as jewellery, watches and clocks remained weak but the pace of contraction has eased. It recorded a 14.7% y/y decrease in the first two months of the September quarter. The unfavourable impact on the total retail sales caused by weak sales of luxury items was largely diminished by robust local consumption. Retail expenditure is expected to continue to be supported by the steady expansion of local consumer demand supported by the low unemployment and rise in wages. In spite of the decline in spending by mainland Chinese tourists on luxury items, total Chinese tourist arrivals continued to maintain a solid double digit growth, increasing by 14.4% y/y in the first two months of the September quarter, with total tourist arrivals steadily growing by 11.7% y/y over the same period.

The slowdown in economic growth driven by lower tourist spending, has not so far had an adverse impact on the local labour market, which continued to remain close to full employment, with an unemployment rate of 3.3% in August. The rise in the number of jobs and labour force, together with increasing wages, is set to drive the expansion of local spending for the remainder of the year. The job market is expected to remain stable through to 2015, supported by a modest acceleration in economic growth.

Inflation maintained a steady level increasing 3.9% y/y in August, down from 4.0% in July. Notably, electricity, gas and water costs recorded 24.3% y/y growth in August due to the removal of the electricity subsidy in the February budget. The growth of private housing rents has slowed down to a 5.0% y/y increase compared to the beginning of this year.

As flagged last quarter, pro-democracy demonstrations have since taken place in Hong Kong due to discontent with China’s proposed democratic election terms and China’s interpretation of Hong Kong’s Basic Law. Known as “Occupy Central”, protests commenced on 28th of September blocking major streets in parts of Admiralty, Central, Mong kok and Causeway Bay. At the time of publishing this report the demonstration and blockages were continuing. While no direct impacts to the portfolio have been observed, Management is focused on the potential indirect impacts that may arise should Mainland China visitor arrivals and retail sales decline over the medium term as a result of the protests. Although the protests have placed some uncertainties to the Hong Kong economy for the rest of the year, the economy currently remains fundamentally strong.

Rent

The warehouse property market remains tight with market vacancy closing at 0.9% as at 30 September. The quarter saw more occupiers renew due to limited relocation options in the market. Top Concept Logistics and A.S. Watson Retail renewed 106,205 sq ft and 93,131 sq ft respectively in Hutchison Logistics Centre. Limited availability and higher rentals have also driven some occupiers to more outer locations such as Tuen Mun and Sheung Shui. Nippon Express leased 120,000 sq ft at a face rent of $10 per sq ft per month on the first floor of Jumbo Plaza in Sheung Shui, while Ferrari took up 62,000 sq ft at a face of $15 per sq ft per month on the ground floor of Jumbo Plaza. The active market sentiment pushed rentals higher, with a market rental increase of 3.7% recorded for the quarter.

Capital valuesThe industrial / warehouse market recorded 794 transactions for a total consideration of $7.1 billion in the September quarter, up by 19% and 20% respectively compared to the last quarter. With the improvement of the transaction volume, the capital values increased 5.8% for the quarter and 15.6% y/y for the en-bloc / institutional market. The market cap rate for the strata market remained largely unchanged at 4.3%, while for the en-bloc / institutional market the market cap rate compressed slightly to 5.5%.

Market commentary


3Q14(HKD psf

pm)

Q-o-Q Change

%

Y-o-Y Change

%

3Q14(HKD

psf)

Q-o-Q Change

%

Y-o-Y Change

%

3Q14 Q-o-Q Change

(bps)

Y-o-Y Change

(bps)

JLL (Institutional market) 11.0 3.7 10.4 2,408 5.8 15.6 5.5 -10 -30

Savills (Strata market) 10.7 1.9 12.4 3,060 1.9 6.2 4.3 0 0

Hong Kong Rental Index (Warehouse)

Hong Kong Capital Value Index (Warehouse)

Note: Figures for Q3 (September quarter) 2014 are provisional.Source: Savills Research & Consultancy (Hong Kong), Jones Lang LaSalle (Real Estate Intelligence Service).

Seven transactions over $100 million were recorded over the quarter for a total consideration of $2,277 million, up around 26% from the previous quarter. Of the seven transactions, two properties were purchased by end-users for self-occupation. The remaining five properties were acquired by investors with the purpose of revitalization.

Index 2004 Q1=100

235.3

225.4

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

Q31

4

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

Q31

4

Q41

3Q

313

Q21

3

Q31

2Q

412

506.3

310.5

0

100

200

300

400

500

600

Savills (strata) Jones Lang LaSalle (institutional)

Market commentary (cont)Rents Capital Values Market Yield


13

Hong Kong Listed Real Estate Investment Trust (REIT) Market

The Hong Kong listed market was slightly down 1.1% from 23,191 to 22,933 as at the end of September 2014.

The total market capitalisation of the eight REITs listed on the Hong Kong Stock Exchange (HKSE) increased by 3.1% q/q to US$23.5 billion.

The estimated dividend yield¹ increased slightly from 6.5% in Jun 2014 to 6.7% in Sep 2014, representing a 4.7% 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 41.1% as at 30 September 2014, remaining largely unchanged from the previous quarter end.

1 Bloomberg estimates. Ratio calculated by dividing the Dividend Per Share (DPS) estimate based on the current fiscal year provided by the requested firm/broker by the current price of the security.

Hong Kong listed REIT performance 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

409

/14

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.

Discount / Premium to NAV Yield

Source: Bloomberg. Source: Bloomberg.

%Discount/Premium to NAV

Prosperity Link GZI Hui Xian Fortune Sunlight Regal Champion Hong KongAverage

(49) (48)

85

(20) (16)

(34)(26)

(54) (51)(58) (57) (59) (55)

(41) (45)

(33) (37)

30 Jun 1430 Sep 14

%Dividend yield

Hong KongAverageChampion

Prosperity

Regal

Sunlight

Fortune

GZI

Link

Hui Xian

4.1

6.7

6.1

6.8

8.1

6.0

7.4

7.9

4.3

6.5

8.1

5.9

6.0

8.0

7.5

7.06.6

5.4

30 Sep 14 30 Jun 14


Hong Kong container ports marketGlobal container throughput during the second quarter of 2014 grew at 5.5%, more than the growth of 3.9% y/y for the same period last year. The Asia region grew at 6.1%, for which North Asia, Greater China and South East Asia grew at 4.5%, 6.7% and 5.2% respectively. Across the globe, North America and European region maintained steady growth at 6.9% and 3.3%, while Middle East and India region surprised the market by strong growth of 7.8%

China’s GDP has grown around 7.4% during the first half of 2014. The growth rate in container traffic at Chinese ports has increased to 6.7% during the second quarter from 6.4% in the first quarter.

Volume growth in the South China region continued to be weak compared with Northern and Eastern China ports. From January to August 2014, Hong Kong port volume, including Kwai Chung, grew by 3.0%, while that for its regional rival Shenzhen grew by only 1.0%.

Drewry’s growth forecast for global container handling in 2014 has been revised to 5.2% from a previous 4.9%, largely as a result of stronger Asian export flows into Europe and the US during the second quarter. Higher volumes in the Middle East and Indian trades have also contributed to the improving picture for 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

408

/14

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

West16.8%

Hong KongPrime Port37.1%

Hong Kong Port Area41.7%

New Territories East3.1%

New TerritoriesNorth1.3%

Core95.1%

Enhancedreturn assets

4.9% 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

09/1

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

97.7

98.5

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

97.2

98.2

99.499.9 99.7

99.8 99.899.9 99.9

99.3

92.792.0

99.0

8.9

24.4

35.9

7.0

11.9 11.9

%

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

DHL

OM Log

Equinix

JSI Logistics

WPG Electronics

PCCW

Dairy Farm

LF Logistics

Santa Fe Transport International

Yusen Logistics

%

6.8

5.4

4.2

3.6

3.0

2.9

2.6

2.3

2.3

2.2


Portfolio occupancy and leasing

The portfolio continued its strong performance in the September quarter with low vacancy and strong rental reversions achieved.

Portfolio occupancy increased slightly from the June quarter from 99.8% to 99.9% due to the signing of13,147 sq ft of new leases in the office portion of ATL Logistics Centre. The Hong Kong warehouse market continues to operate at close to full occupancy and as such, there were few customer movements during the quarter.

As of 30 September 2014, there was no vacant warehouse space in the portfolio, with the only vacancy of 26,501 sq ft located in the office portion of ATL Logistics Centre. CBRE continues to act as the lead marketing agent for the ATL office space premises to source potential customers. Two office units of 3,029 sq ft and 4,184 sq ft, which had previously been vacant since 2002 and 2004 were leased to eCargo Enterprise and Shing Kee Godown Services at ATL. A further ATL office unit was leased to a new customer Enterprise Manufacture Group, who leased 5,934 sq ft

A total of 796,469 sq ft of new leases and renewals were transacted during the September quarter, representing 5.1% of the GLA in the portfolio. New leases signed represented 14.7% (117,203 sq ft) of the total transacted area for the quarter, while renewals accounted for 85.3% (679,266 sq ft) of leases and achieved an average uplift of 62.8% (19.5% annualized) over passing rents. The average retention rate for the quarter was 84.7%.

Three new customers leased a total of 16,604 sq ft in the September quarter. In addition to the Enterprise Manufacture Group lease at ATL, JEB Greater China, a supplier of architectural products and services, leased 4,145 sq ft in Goodman Shatin Logistics Centre and Upstar Technology, an electronics company, leased 6,525 sq ft in Goodman Kwai Chung Logistics Centre.

Geodis Wilson, an anchor customer at Tuen Mun Distribution Centre, continued to expand by leasing an additional floor (32,776 sq ft) at Dynamic Cargo Centre where they have an existing lease of one floor (32,776 sq ft). This is the second consecutive quarter that Geodis Wilson has taken expansion space in the portfolio and they are in discussions to lease an additional half-floor in Dynamic Cargo Centre. Geodis Wilson is currently the 12th largest customer in the portfolio, however, upon commencement of the new lease in Dynamic Cargo Centre, Geodis Wilson will occupy 303,718 sq ft and will move up among the top-10 customers.

Significant renewals during the quarter included DHL’s renewal of three floors at Tuen Mun Distribution Centre (96,303 sq ft) and ATL (16,611 sq ft). Oxford University Press renewed their premises at Dynamic Cargo Centre (85,328 sq ft) and Via Mat renewed their lease at Global Gateway (16,660 sq ft) achieving the highest rent for ramp access space in the building.

At ATL, strong rental reversions to market continue to be achieved with the Alps Logistics, LF Logistics and Sagawa Express renewing a total of 197,615 sq ft at an average uplift of 105.2% (31.8% annualized).

Portfolio management


17

Tuen Mun Distribution Centre


Case studyTexaco CentreTexaco Centre was acquired by the Fund in June 2007 as the Fund’s first enhanced return acquisition, and through active asset management it has been successfully established as a key asset in the Hong Kong portfolio. Texaco Centre is located in Tsuen Wan, which has been experiencing rapid transformation through urban renewal and now includes residential, commercial, retail, hotel and industrial uses. Subsequently this has resulted in reduced available space for warehouse operations in a location that is in close proximity to the Hong Kong container ports and has excellent accessibility to other areas of Hong Kong and mainland China.

Increasing tourist arrivals, domestic demand and a robust local economy has resulted in a change in the nature of warehouse users to occupants predominantly focused on domestic consumption. This shift in the customer mix is reflected at Texaco Centre with retailers comprising two of the three largest customers in the building. Zara, the leading Spanish high street fashion retailer, first leased 43,054 sq ft in the building in 2011 and has since expanded to 75,168 sq ft, representing 19.5% of the building income. Suning, a leading mainland China retailer of electronic appliances, leased 40,342 sq ft in 2011 and use Texaco Centre as one of its main storage and distribution warehouse for their Hong Kong retail outlets.

Another major customer is JSI Logistics, who is a US logistics and supply chain management company, leases 326,787 sq ft across

three buildings in the Fund’s portfolio including 63,252 sq ft at Texaco Centre. JSI logistics was one of the first customers to commit to the building following the initial asset repositioning in 2007, and have since leased additional space in Global Gateway and Tsuen Wan International Centre to secure their position as the fifth largest customer in the portfolio.

Management recently completed the facade upgrade and rebranding for Texaco Centre in line with the Fund’s objectives, with a total project cost of $6.4 million (1.1% of book value). The repositioning was similar to Dynamic Cargo Centre and Global Gateway and provides the portfolio with significant branding and positioning in one of Hong Kong’s key warehousing markets.

New customers introduced into the building during the past 12 months included Your Space Tsuen Wan, a self-storage operator, who leased 15,582 sq ft and will use Texaco Centre as a hub for their Hong Kong operations. The self-storage business is a rapidly expanding market in Hong Kong, and Management is currently in discussions with Your Space on further opportunities within Texaco Centre and elsewhere in the Fund’s Hong Kong portfolio.

Limited supply and sustained demand levels have assisted in providing strong recent leasing results, including Texaco Centre where the average occupancy over the past 12 months was 99.2%, which assisted in providing an average uplift on passing rents of 53.1% (20.8% annualised).


19

Texaco Centre


Goodman Tsuen Wan West (Project Moon)

During the quarter the Fund successfully acquired a new enhanced return investment known as Goodman Tsuen Wan West or Project Moon. The property was acquired for a total consideration of HK$1.02 billion and comprises 467,616 sq ft of existing GLA on a site area of 118,268 sq ft.

The property is currently under-rented and offers enhanced return opportunities through repositioning or medium term redevelopment. The property is currently leased to a single customer expiring in February 2016 and Management will use this time to determine the most appropriate strategy to extract maximum value.

The acquisition further cements the Fund’s leading position in Hong Kong and will allow GHKLF to gain enhanced return exposure over the medium term.

Capital transactions

Goodman Tsuen Wan West

Financial report (unaudited)

Contents+

22 Income statement (unaudited)23 Balance sheet (unaudited)24 Notes to the financial statements (unaudited)


Income statement (unaudited)

Note 1 Apr 14to 30 Sep14

$000

Net property income (excluding Harrier, Goodman Interlink) 1 345,345

Fund management fee (40,131)

Gain on disposal of investment properties 51,157

Other expenses from operations (853)

Profit before interest, revaluation and taxation 355,518

Interest income from bank deposit 359

Interest income from a joint venture 18,608

Senior bank loan interest expense nterest expense (87,305)

Subordinated debt interest expense (109,720)

Fair value change on derivative financial instruments (8,474)

Net profit before revaluations and taxation 168,986

Property revaluations 2 959,495

Share of profits of joint ventures 124,250

Taxation 3 (27,455)

Net profit after tax 1,225,276

Retained/not available for distribution

Gain on disposal of investment properties (51,157)

Property revaluations (959,495)

Deferred taxation 27,052

Fair value change on derivative financial instruments 7,674

Share of revaluations of joint ventures (1,452)

Share of deferred taxation of joint ventures 4,946

Share of depreciation of joint ventures 17,152

Net profit available for distribution 269,996

Interest income on deposit with TCAL 106,511

Total cash income to investors 376,507

Cash return (post-performance fee) (HK cents) 3.07

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.

22


Balance sheet (unaudited)

Note 30 Sep 14$000

Non‑current assetsInvestment properties 13,706,056Investments in joint ventures 5,744,018Amount due from a joint venture 618,562Derivative financial instruments 18,371Total non‑current assets 20,087,007Current assetsDebtors, prepayments and deposits 114,725Tax prepaid 2,318Cash at bank 33,270Total current assets 150,313Total assets 20,237,320Current liabilitiesCreditors and accruals 168,062Rental deposits 193,744Tax payable 3,338Total current liabilities 365,144 Non‑current liabilitiesLong term borrowings 4 10,220,021Derivative financial instruments 38,367Deferred tax liabilities 209,110Total non‑current liabilities 10,467,498 Total liabilities 10,832,642Net assets 9,404,678EquityContributed equity 1,629,797Hedging reserves (27,369)Retained earnings– Distributable 136,053– Non-distributable/retained 7,666,197Total equity 9,404,678Number of shares (000) 6,186,842NAV per share ($) 1.5201Gearing (%) 24.1

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.

23


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 Sep 14

$000

Wholly owned entities 345,435

Liberty Bell Investments (90)

NPI (wholly-owned) 345,345

NPI (joint ventures) 204,513

Total NPI 549,858

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 losses brought forward.Deferred tax on depreciation allowances is provided in accordance with HKFRS. The taxation change shown in the income statement comprises the following:

1 Apr 14to 30 Sep 14

$000

Current taxation 403

Deferred taxation 27,052

Total 27,455

24


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

Note $000

Bank loans - unsecured (i) 1,297,000

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

Subordinated loan 5,877,500

Less: unamortised transaction costs (55,679)

Total 10,220,021

(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 1,100 197

5 year tenure Term loan Mar 19 400 400

Total 2,450 1,297

(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 3

Total 1,700 1,603

Goodman Interlink debt is included in “Interests in joint ventures” as this is a liability of Goodman Interlink, a joint venture company. As at 30 September 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)

25


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

Sep 15 Sep 16 Sep 17 Sep 18 Sep 19

Total forecast debt ($M) 5,200 5,200 5,200 5,200 5,200

Amount hedged ($M) 3,996 3,158 2,613 1,192 895

Hedged (%) 77 61 50 23 17

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) (%) 2.23 1.57 1.85 2.25 2.32

Forecast floating rate (excluding margin) (%) 1.34 2.35 2.79 2.95 3.07

Effective rate (excluding margin) (%) 1.53 1.32 2.06 2.64 2.82

6 NAV

30 Sep 14

NAV (cum-dividend) ($000) 9,404,678

NAV (ex-dividend) ($000) 9,268,625

NAV per share (cum-dividend) ($) 1.5201

NAV per share (ex-dividend) ($) 1.4981

Notes to the financial statements (unaudited) (cont)

26

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.

DPS Distribution per security.

DTZ DTZ Deheham Tie Leung Limited.

GAL or Goodman Asia Goodman Asia Limited.

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 (HK) Limited, trading as Goodman Group and, where the context requires, their controlled entities.

HIBOR Hong Kong Inter-Bank Offered Rate.

HOA Heads of Agreement.

IPO Initial Public Offering.

JLL Jones Lang LaSalle Limited.

LTV Loan-to-value.

NAV Net asset value.

NPI Net property income.

REIT Real estate investment trust.

Savills Savills Research & Consultancy (Hong Kong).

Glossary

27

Sq ft Square feet.

Sqm Square metre.

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.

Corporate directory

FundGoodman Hong Kong Logistics Fund

Registered office2nd Floor, Harbour Place103 South Church StreetPO Box 472 George TownGrand Cayman KY1-1106Cayman 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. October 2014.

28

Documents

Goodman Hong Kong Logistics Fund Quarterly Report .../media/Files/Funds/GHKLF/ghklf reporting... · Goodman Hong Kong Logistics Fund Quarterly Report September 2014 ... 18 Case study