Growthpoint's Earnings Will Be Held Back by Rising Finance Costs, Until Debt Costs Peak

Growthpoint Properties Australia generates about two thirds of its rental income from office property and one third from industrial property. Its market capitalization is small, a fraction the size of heavyweights Dexus and GPT. The REIT's property portfolio is mainly composed of smaller assets in secondary locations, but long leases and a combination of luck and savvy investment decisions allowed it to sidestep major impacts from the pandemic. About 20% of the office portfolio is located in Melbourne's central business district fringe or suburbs. The group’s major recent office development project, Botanicca 3, is in Melbourne’s Richmond and was completed in early 2020, initially with no tenants. The building was predominantly leased over the course of 2021 via agreements with major tenant Bunnings. Queensland and New South Wales each make up about one fourth of the portfolio each, mostly fringe or non-CBD locations such as Sydney’s Parramatta. While planners want to decentralize Sydney, it remains to be seen how successful this will be. About half of Growthpoint’s industrial portfolio is composed of four distribution centers leased to Woolworths. Growthpoint paid to develop one of these sites, but Woolworths guaranteed a return of 6.75% on the development costs. In return, Growthpoint agreed to an early surrender of Woolworth’s lease on another site at Broadmeadows. This was a savvy move as it allowed Growthpoint to lock Woolworths in, and sell the vacant Broadmeadows site at a time when demand for industrial property remained solid. Woolworths has a significant lease expiry in fiscal 2026. However, Growthpoint management noted that Woolworths typically takes four to five years to plan a large move, and there was no evidence of such a move yet. We think this is reasonable, and our base case is that Woolworths renews.