Public

GPT Group (GPT) 2014 AGM Voting Intentions

Company/ASX Code : GPT Group (GPT)
Registry : Link Market Services
Poll/Show of Hands : Poll
Webcast : Yes
Venue :
Doltone House
181 Elizabeth St
Sydney, New South Wales 2000
Monitor : Mr Geoffrey Orrock
AGM Details / NoM : Thursday 8th May, 2014
ASA Position
Not Applicable
Item 1: Approval of accounts

This was the first time your monitor had assessed an A-REIT company. Asked to describe their business the Chair of the Rem committee Mr Gene Tilbrook said the business was one of value adding through GPT’s skilled management and involved building or finding and buying good property, developing and managing it and exiting at a suitable time. GPT owns a portfolio of high-quality Australian commercial property valued at $8.6 billion and has a funds management platform with $7.1 billion of property assets under management.


The company continues its slow recovery from the disastrous international expansion of 2007. The rebuilding strategies involve –


1. Elevating Total Return (defined below) as the primary measure across the business;


2. Expanding Funds under management to $10 billion


3. A frugal approach to management and a fortress balance sheet.


The management expense ratio is 0.4%, one of the lowest in the sector.


With a target of 9% annual total return (comprising distributions plus growth in net tangible assets) GPT achieved 8.5% in 2013 (2012 9.5%).


Statutory NPAT was $571.5 million (2012 $594.5 million) down 3.9% due to a lower level of property valuation growth that occurred compared to the previous year ( $92 million in 2013, ($196 million in 2012)). Realised Operating (Underlying) Income ( ROI ) which excludes change in valuations and other items the company considers not related to the underlying business however was up 3.4% to $472 million.


Distribution policy is 80% of ROI (basically cash profit) and the distribution for 2013 was 20.4 cents, up 5.7% on the previous year (2012 19.3 cents).


Gearing increased only slightly from 21.7% (at 31/12/2012) to 22.3% (at 31/12/2013), consistent with GPT’s conservative approach to acquisition.


Total Shareholders’ Return (TSR) was negative (2012 26.9%) with the share price at years end 2013 28 cents lower than the year before (a fall of 7.6% to $3.40). We note that since year end the share price has recovered to around $3.90.


In 2014 GPT will again target Total Return of 9% and a 3% increase in EPS.


ASA Position
For
Item 2.1: Re-election of Gene Tilbrook

Mr. Tilbrook is a non-executive director of three other listed companies, a councillor of Curtin University and the AICD and a board member of a theatre company. As such he has a reasonable workload.


Mr Tilbrook chairs the Nomination and Remuneration committee. He attended 17 out of 18 Board meetings and all six of the Nomination & Remuneration Committee meetings he chairs.


He also attended our pre AGM by telephone and was particularly helpful in increasing our understanding of GPT.


Mr Tilbrook first became a director in May 2010 and currently holds 45,000 shares (the value of which is roughly equivalent to his annual director’s fees).


ASA Position
Against
Item 2.2: Remuneration Report

The director’s pool of $1.65M was approved at the 2008 AGM and no increase is sought this year. GPT’s is a busy Board, with 18 Board meetings held during the year. Directors also attended up to 10 committee meetings. Attendance at meetings by all directors was satisfactory.


The ASA commends the company for its action in holding directors fees unchanged for a sixth successive year.


The Chair receives $365K in total fees (low in the range ) and members receive up to $220K (around mid-range ).


ASA agrees with the company that NED’s should have equity holdings equivalent to a year’s fees in the companies on whose Board’s they sit. Both the Chairman and Mr Tilbrook meet our requirements. It is particularly disappointing that one Board member who has been a director since prior to the disastrous decision to enter the international market holds “skin in the game” of only 9,450 securities. ASA will vote against NED’s who do not demonstrate confidence with significant ownership in company equity.


EXECUTIVE FIXED SALARY


At target performance executives have up to two-thirds total pay at risk.


The CEO and MD’s base pay increased almost 4% to $1.5M. Senior executives received base pay increases up to 5%. The CEO’s total (statutory) pay was down from $4.5M to $4.3M, due largely to a decrease in STI offset by an increased LTI accrual. Other senior executives typically incurred similar falls in total pay. This is substantial remuneration for below target growth and a negative TSR.


A sign on bonus package of $500K in performance rights (priced at a discount to the market ) received by one senior executive in November 2012 converted 50% unconditionally in September 2013, with a further 50% to vest unconditionally in September 2014. ASA is absolutely against such payments which the company made no attempt to justify and shareholders might rightly wonder what value they received from such apparent extravagance. We asked the company where such packages are provided as compensation for benefits foregone and costs to relocate,that the remuneration report clearly justifies such payments.


SHORT TERM INCENTIVE


The CEO and MD’s target and maximum opportunities were 100% and 125% of base pay. Other senior executives had target and maximum opportunities of 50-80% and 62.5-100%


For both years 2010 and 2011 the STI paid was 94%. In 2012 the Board intervened to adjust the ROI which resulted in the EPS growth falling from 8% to 4.65%. Despite what is comparatively low growth the STI outcomes were still around 80%.


The Board set the 2013 STI targets at higher levels than the previous year. The primary financial performance measure is EPS (Realised Operating Income per security):


Threshold 25.10 cps ,3.5% growth

Target 25.69 cps ,6.0% growth

Stretch 26.30 cps ,8.5% growth


(1% growth equates to an approximate increase in ROI of $4.5M ).


At the threshold level no STI is paid.


The actual figure achieved was 25.71 cps, however the Board exercised its discretion again and adjusted ROI downward to an EPS growth of 5.5%.


This resulted in the CEO receiving 53% of his maximum opportunity (2012 83% ) with most senior executives also receiving STI in the mid-range in 2013 (2012 around 80% ).


GPT pays all STI in cash. That may change in 2014 with a complicated equity deferral process for 50% of STI to be put to shareholders for approval at the upcoming AGM. ASA’s preference is that at years end STI is paid 50% in cash and the remaining 50% awarded in equity (calculated at market price) with a two year service lock.


LONG TERM INCENTIVE


The 2011 LTI award vested at the end of 2013. The 3 hurdles, each with equal weight, were relative (rel) TSR vs the top 80% of the ASX 200 property index, EPS growth vs CPI, and Total Return vs WACC.


For the rel TSR hurdle, 50% of the rights vest at the 51st percentile and 100% vest at the 75th percentile. GPT quotes TSR performance of 47.6% over 3 years which ranked four out of eight and fell in the 57th percentile.


As a result 63% of these rights vested.


For the EPS hurdle, 50% of the rights vest if the EPS growth = CPI and 100% if EPS growth is CPI plus 1%. EPS growth was 18.6% and as a result 100% of these rights vested.


For the Total Return (TR) hurdle the rights begin to vest above 8% TR and fully vest at 9% TR. GPT achieved a CATR of 7%. Hence none of this award vested. 54% of the 2011 grant vested. Shareholder return was 35%.


ASA questions whether any of these hurdles for the 2011-2013 grant are sufficiently challenging.


For the 2013-2015 three year performance period, the CEO and MD’s maximum LTI opportunity is 150% and for senior executives it is 100%. The number of rights granted was determined by dividing GPT’s last quarter VWAP of $3.5415 into the grant value.


The LTI rights performance period remains at three years. Half of the rights granted this year will be subject to a higher TR hurdle with 25% vesting at a TR of 9% and pro rata to 9.75% when 100% of the rights will vest. The other half will be subject to a TSR hurdle relative to 11 selected constituents of the ASX 200 A-REIT Index with vesting conditions identical to those for the 2011 grant. It remains to be seen whether these higher hurdles are sufficiently challenging.


With all STI in cash, a three year LTI performance period, some concerns about quantum and insufficiently challenging LTI hurdles the ASA will vote against the remuneration report this year. However the proposed changes to both STI and LTI in 2014, if approved by shareholders, will go a part way to addressing our concerns.


ASA Position
Undecided
Item 3: Approval of amended GPT performance rights plan

Changes to the STI plan in 2014 require consequent changes to be reflected in the GPT Group Stapled Securities Rights Plan. In addition the rules have been tightened for when employment is terminated, control of the company changes and when rights issues, bonuses or reconstructions occur, changes which impact both the STI and the LTI plans.


It is also proposed to introduce a deferred component to the STI Plan for senior executives who participate in the LTI plan. Accordingly, for 2014 and thereafter, it is intended that the STI award will be delivered 50% in cash and 50% as a “deferred” component. This deferred component will initially be awarded in the form of performance rights under the Plan, with the Rights then, to the extent performance conditions are met, converting to restricted Stapled Securities at years end.


The initial grants of deferred STI rights will be made during the current year, which commences on 1 January 2014 and ends on 31 December 2014.


After the end of the year, performance against the individual executive’s key performance indicators will be assessed and all or a portion of the Rights will convert into Stapled Securities based on the extent to which the executive is assessed to have met the KPIs. These Stapled Securities will be subject to a one or two year service lock. To the extent the executive’s KPIs are not achieved, the Rights will lapse. The Stapled Securities may be issued or sourced on or off market.


It seems an unnecessarily complex arrangement compared to the simple arrangement most companies adopt where the total amount of STI is determined at year’s end, then half the amount is paid in cash and half in deferred securities locked for a service period, the number of securities calculated using a market price. If the arrangement can potentially increase the amount of STI paid, ASA would consider voting against the resolution.


ASA Position
Undecided
Item 4: Grant of performance rights to CEO (STI)

As noted in resolution 3 it is proposed that the CEO and MD’s STI is divided into 2 parts.


For 2014 the first part will be a payment in cash up to a maximum opportunity of 62.5% of his fixed salary i.e $937,500. The second part will be deferred STI in the form of performance rights. The value of the proposed grant is also equal $937,500 and at the Q4, 2013 VWAP of $3.57 equates to a grant of 262,605 rights.


The arrangement is subject to performance conditions which the company says are confidential. We will listen carefully to what the company has to say before we decide whether or not to support the resolution.


ASA Position
Against
Item 5: Grant of performance rights to CEO (LTI)

In 2014 the company seeks approval to make a grant of performance rights to the CEO and MD as part of his LTI plan.


The proposed grant is 630,252 securities valued at $3.57 providing an LTI potential of $2,250,000 which is 150% of the CEO’s base salary.


The value of the rights has been calculated using GPT’s Q4, 2013 VWAP.


The conditions under which these rights will vest are identical to the 2013-2015 LTI conditions described under Resolution 2.


Noting our remarks about challenging targets, a 3 year performance period and quantum we will vote against this resolution.


ASA Position
Undecided
Item 6: Amendments to Constitution

Changes to the Trust Constitution are required consequent upon recent ruling changes by ASIC in respect of unit prices and a request by the company to be given the right to conduct “off-market” share “buy backs”.


The unit price matter is a house keeping matter and provides the company flexibility in fund raising for rights issues and placements.


We understand that regarding placements any resolution to make placements will be subject to unit holder approval (as appropriate).


In the section of the Annual Report entitled Corporate Governance there is a section “Principle 6: Respect the rights of shareholders”. We need to ensure that for any future placements that this principle is followed and small shareholders are treated pari pessu with other institutional investors (i.e. equally).


We will ask the company from the floor of the AGM to make assurances to small shareholders that as far as possible they will get equal treatment.


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