Growthpoint Earnings: Exceeds Our Forecast, but Helped by Pulling Forward Rental Income

No-moat Growthpoint Properties Australia’s GOZ fiscal 2023 result exceeded our expectations, though it was helped by income being pulled forward from future periods. Fiscal 2023 included one-off revenue from a large tenant ending a lease early, with almost two years of remaining rent paid out and recognized in fiscal 2023 but a corresponding vacancy in fiscal 2024 that needs to be filled. Funds from operations was AUD 26.8 cents per security (3% below fiscal 2022), and distributions totaled AUD 21.4 cps (up 3% on fiscal 2022). Guidance for fiscal 2024 is for FFO of AUD 22.5-AUD 23.1 cps and distributions totaling AUD 19.3 cps.

We estimate FFO of 22.9 cps, 15% lower than 2023 due to interest-rate rises, soft leasing conditions and the vacancy left behind by the departing tenant. Our fair value estimate falls 5% to AUD 3.80 due to ensuing slightly lower rental income assumptions. Despite this, Growthpoint securities screen as significantly undervalued, trading at about a 37% discount to our fair value estimate.

Our fiscal 2024 forecast assumes a higher cost of debt. The firm’s weighted average cost of drawn debt in fiscal 2023 of 4.6% was 35% higher than 3.4% in fiscal 2022. The firm also increased its debt over the year to fund acquisitions and a securities buyback program. As such, finance costs were 65% higher in fiscal 2023 from the prior year. The firm’s net gearing (net debt/tangible assets) rose to 37.2% from 31.6% at the end of 2022. While that’s at the bottom end of Growthpoint’s targeted 35%-45% gearing range and well below the firm’s 60% covenant, we don’t think it would be prudent to deliberately raise gearing from here, given economic risks. Gearing is higher than for most office REITs, and we view it as aggressive, given Growthpoint’s higher skew to lower-grade suburban offices, where demand is more variable than in city centres.