Company Reports

No-moat GPT Group posted a reasonable first-quarter update, with near full occupancy across its retail and industrial portfolio, but office leasing conditions declined 0.3% to 92%. However, GPT Group made progress during the quarter, with more than double the amount of office space leased than in the first quarter of 2023. We expect sluggish office conditions to eventually improve, driven by population growth, new transport infrastructure close to GPT’s assets, and less rival supply. In line with our full-year estimates, management reaffirmed its fund from operations of AUD 0.32 per security and distribution of AUD 0.24 guidance. GPT appears undervalued, trading at a material discount to our AUD 5.55 per share fair value estimate.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group to build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group to build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

GPT’s 2023 annual result revealed funds from operations of AUD 0.31 per security and distributions of AUD 0.25, in line with our estimates and management guidance. 2024 guidance of AUD 0.32 includes an anticipated boost from one-off asset disposal, implying a 2% fall in 2024 FFO, excluding the asset sale. We assume a lower distribution in 2024 of AUD 0.24, also in line with guidance, with free cash flow likely to be weighed down by elevated office incentives. Incentives typically take the form of capital expenditure to entice office tenants to sign a lease. Incentives averaged an elevated 35% of office lease value over the half, and GPT Group expects elevated office incentives for the next couple of years, which seems likely given the new supply continues to arrive, and we estimate it will take several years to soak it up via demand growth.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

GPT’s decent first-quarter operating update adds confidence that our thesis is playing out. GPT screens as one of the more undervalued REITs in our Australian coverage, with the AUD 4.64 security price a circa 10% discount to our unchanged AUD 5.25 fair value estimate, compared with the broader property sector mostly looking fairly valued.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

No-moat GPT’s fiscal 2020 result came in ahead of our expectations. The REIT posted funds from operations of AUD 28.48 cents per security, exceeding our estimate of AUD 27 cps. Distributions surprised on the upside, totalling AUD 22.50 cps, against our estimate of AUD 19 cps.

There’s been little office leasing or transaction activity of substance in 2020, but a trickle of information reaffirms our unchanged fair value estimate for no-moat GPT at AUD 4.60.

GPT’s retail, office and industrial properties generate about three quarters of its recurring revenue. Another 20% comes from funds management, however we do not assume substantial growth from new fund launches or fund inflows for GPT. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

GPT Group’s first-quarter operational update confirms our view of a challenged environment for retail property landlords. Total sales for tenants in the shopping centre portfolio were up only 1.3% in the year to end March, pointing to a significant slowing on the 2.4% growth for the year to December 2018. For the high rent-paying specialty tenants, operating performance was similarly weak. Trailing 12-month specialty sales growth was 1.9% at end March, versus 3.6% at end December 2018. Prepared comments from GPT that retail conditions remain subdued is quite an understatement, as it appears Australian households have significantly tightened the purse strings over the past three months. Against this backdrop of slowing sales, we don’t see GPT or other landlords orchestrating a rebound in rent growth. We’ve been factoring a soft outlook for retail rents in our forecasts for some time and continue to forecast rents rising by 2.3% over the longer term. This is roughly half the average fixed increase of 4.7% GPT has been negotiating on recently finalised retail leases. However, having a swag of leases with high fixed annual increases doesn’t tell the full story as to achieve this GPT needs to separately pay large inducements, or tenant incentives. In 2018, tenant incentives across the office, retail and industrial portfolio were AUD 61 million, equivalent to 10.6% of net rental EBIT.

GPT’s disposal of its 50% stake in the MLC office tower for AUD 800 million, a 3% premium to book value, is a good outcome. Our fair value estimate for narrow-moat-rated GPT remains at AUD 5.40, with the stock screening as overvalued currently trading around AUD 6.20.

GPT Group reported 2018 earnings on a funds from operations, or FFO, basis of AUD 31.84 cents per security, up 3.5% and consistent with guidance. The AUD 5.9 billion office portfolio was the main driver, delivering 5.8% like-for-like income growth and to a lesser extent, the AUD 1.9 billion industrial portfolio, where like-for-like rental growth was 2.8%. The AUD 6.2 billion retail portfolio achieve hard-fought growth of 2.2% as sales in numerous malls were impacted by competitor expansions nearby.

GPT issued a minor upgrade to guided growth for 2018 distributions and funds from operations, or FFO, to 3.5% from 3.0% previously. The upgrade was mostly due to incremental income from the purchase of the Eclipse office tower in Paramatta (acquired for AUD 288 million in September) and stronger-than-anticipated income from the office and industrial portfolio. Following minor forecast revisions, we retain our AUD 5.10 fair value estimate, with narrow-moat-rated GPT Group screening as fairly valued, currently trading around AUD 5.20.

Narrow-moat-rated GPT Group's first-half 2018 earnings on a funds from operations, or FFO, basis of AUD 16 cents per security, or cps, were in line with expectations and increased 3.1% on the previous corresponding period. Guidance was reiterated for 3% growth in FFO per security and distributions and our forecasts are consistent with guidance. The major positive was the ongoing strength in the CBD office markets in Sydney and Melbourne, with vacancy rates for both now around 4.5%. GPT Group estimates rents for its offices in these markets are now 8% below market rates. Provided office demand remains solid, this supports continued rental growth for the next two to three years. Thereafter, more office floorspace is scheduled to come to market weighing on future rent growth. We've raised medium-term office rents expectations and our fair value estimate increases to AUD 5.10 from AUD 5.00. With GPT trading around AUD 5.30, the stock screens as slightly overvalued, with the guided 2018 distributions of AUD 25.3 cps implying a yield of 4.8% at current levels.

As part of its third-quarter operational update, narrow moat-rated GPT Group reiterated fiscal 2018 guidance for distribution and FFO growth of approximately 3%. Our earnings forecasts and valuation are both unchanged. At the current AUD 4.70 share price, GPT trades at a 6% discount to our recently lowered AUD 5.00 fair value estimate. The cut to our fair value was due to lowered retail rent growth expectations as bricks-and-mortar sales are migrating online. We’ve assumed long-term retail annual rent growth slows to 2.3%, but it could be worse if shoppers' reason to visit malls deteriorates materially. The other major risk for GPT is an acceleration in bond yields, which could cause some yield-focused investors to rotate out of property to more traditional bonds.

Narrow-moat GPT Group’s fiscal 2017 earnings on a funds from operations, or FFO, basis, of AUD 30.8 cents per security, or cps, increased 3% on fiscal 2016 and was in line with guidance. The retail and office divisions both reported solid operating metrics, logistics was broadly flat, while funds management was down as expected given the prior year featured a material performance fee. Following a trim to retail rental growth expectations and a slightly higher capital expenditure outlook, our fair value estimate for GPT Group declines to AUD 5.00 from AUD 5.20. With GPT trading around AUD 4.85, the stock screens as undervalued, with the estimated distribution representing a yield of 5.2%.