Company Reports

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.

Growthpoint’s property portfolio is performing robustly in the near term. But as existing fixed-rate debt expires, rising debt costs are weighing on Growthpoint’s earnings, probably until 2027 when most hedges will have expired. Growthpoint’s cost of debt was 4.7% for the first half of fiscal 2024, still below our estimated long-term cost of debt of 6.5%. Gearing of 40.5% is high. An interest cover of 2.9 times doesn’t impress, but it is comfortably above the 1.6 times covenant minimum. However, significantly higher debt costs and a decrease in property income could see Growthpoint flirting with covenants.

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.

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 and Olympic Park. 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 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.

Our Growthpoint 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.

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 and Olympic Park. 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 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.

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.

Growthpoint Properties Australia generates about two thirds of its rental income from office property and one third from industrial property. Its market capitalisation 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 and Olympic Park. While planners want to decentralise Sydney, it remains to be seen how successful this will be. About half of Growthpoint’s industrial portfolio is composed of four distribution centres 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 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.

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.

Growthpoint is a REIT that generates about two thirds of its rental income from office property and one third from industrial property. It’s market-capitalisation is small, a fraction the size of heavyweights Dexus and GPT.

Growthpoint is a REIT that generates about two thirds of its rental income from office property and one third from industrial property. It’s market-capitalisation is small, a fraction the size of heavyweights Dexus and GPT.

No-moat-rated Growthpoint Properties Australia, or Growthpoint, has joined the growing list of AREITs raising equity to take advantage of strong security prices. The raising comprises a fully underwritten AUD 150 million institutional placement and a non-underwritten security purchase plan, or SPP, to raise up to an additional AUD 15 million. The SPP closes July 24 and the issue price is AUD 3.97 per security, a 4% discount to the adjusted last close. South African parent Growthpoint Properties is not partaking in the equity raising and you shouldn’t either. Do not subscribe to the SPP. Growthpoint securities are overvalued. Our AUD 3.30 fair value estimate is unchanged.

Growthpoint reported first-half fiscal 2019 earnings on a funds from operations, or FFO, basis of AUD 12.5 cents per security, or cps, unchanged on the previous corresponding period. Guidance was retained for fiscal 2019 FFO of at least AUD 24.8 cps and distributions of AUD 23 cps. Factoring outgoings for tenant incentives and maintenance capital expenditure (that hit the cashflow statement but not the income statement) gives us adjusted funds from operations, or AFFO, a proxy for the underlying cash generated by the operating business. We forecast fiscal 2019 AFFO of AUD 19.4 cps, roughly 18% below distributions, which will see Growthpoint continuing to borrow to pay distributions for the year. Growthpoint is one of a few remaining Australian REITs that pay distribution above AFFO, and we’d prefer distributions around 100% of AFFO. Low borrowing costs, high occupancy and rising asset values are all conducive to paying distributions above AFFO. However, the strong economic tailwinds and supportive monetary and fiscal policies shouldn’t be banked on to persist forever.

Growthpoint Properties has continued its highly acquisitive strategy, securing the fully let A-grade office tower at 100 Skyring Terrace in the Brisbane CBD fringe location of Newstead for AUD 250 million. The purchase price plus a further AUD 16 million of taxes and costs is planned to be funded by AUD 132 million of existing debt facilities and an equity raising of approximately AUD 135 million via a non-underwritten 1 for 17.65 accelerated non-renounceable rights offer at AUD 3.46 per new Growthpoint security.

There was no major news in Growthpoint Properties’ investor update for the September quarter. We’ve left our forecasts and AUD 3.20 fair value estimate unchanged, aligning with book net tangible assets of AUD 3.19 as at June 2018. At this point, no-moat-rated Growthpoint continues to screen as overvalued, currently trading around AUD 3.55, having fallen around 10% from its recent peak of AUD 3.92 on Sept. 25. The guided distribution of AUD 23 cents per security, represents a yield of 6.5%.

Growthpoint Properties' fiscal 2018 earnings on a funds from operations, or FFO, basis of AUD 24.9 cents per security, or cps, were down 2% on the prior year. The fixed average rental escalator applying to approximately 90% of the portfolio continue to provide earning momentum, with weighted average rent reviews resulting in an increase of 3.3%. We forecast fiscal 2019 FFO of AUD 25.2 cps, up 1.5%. This is comfortably above Growthpoint's guidance (that has historically been conservative) of "at least" AUD 24.6 cps. The main reason for the slow earnings growth is a higher share count from the activation of the dividend reinvestment plan and some earnings dilution from planned asset sales. Distributions are expected to increase from AUD 22.2 cps in fiscal 2018 to AUD 23.0 cps in fiscal 2019, representing a yield of 6.1%. Our fair value estimate for no-moat-rated Growthpoint is unchanged at AUD 3.20 with the stock screening as overvalued, trading at AUD 3.75.

Following years of planning, Growthpoint has hit the trigger on the development of two A-grade office towers, totalling 19,300 square metres at its Botanicca Corporate Park in Richmond, 8 kilometres to the east of Melbourne's CBD. The development is scheduled to complete in late 2020 and project metrics look attractive underpinned by robust growth in effective rents for Melbourne fringe office. Vacancy in Melbourne's inner east is exceptionally low, stated at 4% by Knight Frank. The site has solid transport links being close to Burnley train station and the M1 motorway, both of which bode well for the upcoming leasing campaign.

Growthpoint’s funds from operations, or FFO, for first-half fiscal 2018 of AUD 12.5 cents per security were down 0.5% on the AUD 13.1 CPS on the prior corresponding period, mostly due to lost rents on sold industrial assets. Nonetheless, full-year guidance was lifted from at least AUD 23.6 CPS to at least AUD 24.3 CPS. We viewed previous guidance as conservative, so the upgrade was not a surprise. We previously forecast AUD 24.5 CPS, and our forecasts are largely unchanged, but we raise distributions by 1% to AUD 22.2 CPS. Our fair value estimate for no-moat-rated Growthpoint remains at AUD 3.00, with the stock screening as broadly fairly valued, trading at AUD 3.15.

The use of low cost debt to purchase four warehouses for AUD 46 million near Perth Airport yielding 8.13% is a major factor behind Growthpoint’s upgraded fiscal 2018 earnings guidance. Growthpoint also cited favourable leasing outcomes during the first quarter as boosting its earnings outlook. All up, guided fiscal 2018 funds from operations, or FFO, guidance has been raised by 3% to at least AUD 24.3 cents per security, or cps, from at least 23.6 cps. Our forecasts were ahead of original guidance, and increase just marginally to AUD 24.5 cps as we raise occupancy and rent growth expectation. Our fair value estimate for no-moat Growthpoint is unchanged at AUD 3.00, with the firm screening as broadly fairly valued, currently trading around AUD 3.20.

Due to good progress on raising occupancy and increased rental certainty following a series of new leases, we increase our fair value estimate for no-moat-rated Growthpoint Properties to AUD 3.00 from AUD 2.90. At current levels, the firm screens as slightly overvalued trading around AUD 3.20. We forecast fiscal 2018 funds from operations of AUD 24 cents per security, or cps, implying earnings comfortably achieving FFO guidance of "at least 23.6 cps." Guided fiscal 2018 distributions of AUD 22.0 cps, represent an attractive yield of 6.8% at current levels.