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

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Our Growthpoint GOZ note, published Aug. 18, 2023, showed old forecasts from April 2023 that weren’t updated for fiscal 2023 results. This note corrects that error, and we’ve also amended some midcycle forecasts.

Our latest forecasts include a more rapid increase in interest costs. We also remove some development income, given stubbornly high interest rates and elevated construction costs. After reflecting on this, we see a lower likelihood of profitable new projects on Growthpoint’s balance sheet, or in partnership with clients of Fortius, Growthpoint’s recently acquired funds management business. These negatives are partially offset by slightly improved rental growth assumptions, in part due to leases linked to the Consumer Price Index, which rose again based on numbers released in September. These changes result in estimated funds from operations by 2032 being 14% lower than our April estimates. However, the effect on valuation is neutral. The largest change to the earnings forecasts was interest costs, but our 6.5% estimated long-term cost of debt already factored in higher debt costs. Our fair value estimate remains AUD 3.80, with Growthpoint securities roughly 45% undervalued.

No-moat Growthpoint Properties Australia’s 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. Our fiscal 2024 FFO estimate remains 22.9 cps, 15% lower than 2023 due to interest-rate rises, and the vacancy left behind by the departing tenant.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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