repairing gpt

Business Spectator Article - Repairing GPT

GPT Group’s decision to raise $1.6 billion in equity late last year is looking more and more prudent with hindsight as the scale of its misadventures under its previous leadership continues to shock.

In response to an ASX query GPT today disclosed write-downs, albeit non-cash, of $1.4 billion within its property portfolio and a further $900 million of mark-to-market losses within its currency hedging book.

The real estate write-downs include $450 million for GPT’s core Australian portfolio, $250 million against non-core assets and about $700 million against the disastrous European property joint venture with Babcock & Brown in which GPT invested $1.9 billion.

All up, GPT has written the book value of its properties down by about 11 per cent – well short of the 24 per cent that would trigger breaches of its debt covenants. Thanks to the capital raising, GPT can absorb the write-downs and still have headroom within its banking arrangements of about $2 billion.

The write-downs within the Australian portfolio – one of the best commercial property portfolios in the country – are consistent with recent developments in its sector.

Capitalisation rates are starting to blow out, but so far not alarmingly. GPT said the weighted average cap rates in the local retail portfolio increased by 20 basis points, cap rates for its office portfolio rose by 50 basis points and its industrial portfolio by 40 basis points.

As GPT says, the write-downs won’t affect its operating results or its forecast distribution of 17.7 cents per security, but they do underscore the extent of the value destroyed by the decision to aggressively emulate its stapled security peers near the zenith of the boom in securitised property and both leverage the group and pursue riskier investments in an attempt to generate higher returns.

While GPT pumped nearly $2 billion into a $7 billion joint venture with Babcock which carries about $5 billion of debt, at least those borrowings are non-recourse and GPT has the option of simply walking away, an option that in the market’s mind, at least, is likely to be exercised. In presentations for last year’s capital raising GPT made it clear that a complete write-off was factored into its worst-case scenarios.

As a consequence of the capital raising and some strategic activity on its register, GPT now has Singapore’s GIC Real Estate holding 12 per cent of its capital and Stockland has an exposure of almost 10 per cent. Some of that is through derivatives.

There is still sufficient uncertainty about the environment, and for property more generally, that strategic activity would probably be too high risk at this point. As GPT clears out its balance sheet, however, it is probably bringing forward the moment when Stockland, or someone else, decides the rewards locked up in GPT’s core Australian portfolio are greater than the residual risks.