A stronger-than-expected full year result confirmed the underlying property portfolio continues to perform well and the distribution at 17.7cpu for CY08.The deteriorating global property market outlook reduces our valuation to $0.85 with triggers changing commensurately. Our recommendation is maintained as BUY, though GPT should only be considered by income investors willing to bear some capital risk in the short term – significantly less so now at 30cpu given the extreme falls already suffered.
The full year result to December 31 2008, was an operating profit before tax of $0.52bn but a headline loss under AIFRS of $3.25bn following non-cash property and interest rate hedge writedowns. Profit from the underlying property portfolio is above expectation, supplemented by a $52.3m development profit.
Portfolio metrics remain solid with the investment property portfolio 99.2% occupied overall with 5.2-7.2 years weighted average lease expiry and generating overall like-for-like income growth of 5.5%. GPT has a high-quality portfolio of CBD office towers and regional shopping centres spread across Australia, predominantly leased to strong tenants with low default risk.
Following property revaluations, the Australian portfolio capitalisation rate weakened 50bps overall to an average 6.5%, broadly consistent with movements in other AREITs. This contributed to manageable balance sheet gearing of 33.7% (covenant 40%) and look through gearing of 46.6% (covenant 55%), with interest cover of 2.5x. NTA weakened to $1.43 diluted. With debt in the Babcock & Brown Joint Venture definitely non-recourse, GPT claims headroom of $1.9bn on a balance sheet basis and $2.4bn on a look through basis, providing scope for a further writedown in the Joint Venture equity and a substantial weakening in capitalisation rates before breach, with only nominal refinancing required until 2010. While GPT has already written off its ordinary equity in the Babcock & Brown Joint Venture, it still has over $1bn of preferred capital which is at risk of loss in the event of further property writedowns. GPT has good scope to upwardly renegotiate its lending covenants, currently on largely unsecured debt, by offering major property assets as security and will raise some capital from the distribution reinvestment plan. Though an equity raising currently appears very unlikely in the short term, volatility in global property and capital markets mean it cannot be absolutely ruled out in the medium term.
Following the resignation of the CEO and planned retirement of the chairman, GPT is currently under caretaker management. Disappointingly, no announcement was made on the appointment of a new CEO, with the announcement of a new chairman apparently on track to be made at the AGM and then appointment of a new CEO. Caretaker management is following the current enunciated strategy of asset sales to reduce debt and provide an exit from the Babcock & Brown Joint Venture, which continues to be cash flow positive around $100m pa, but is not included in guidance and appears to be utilised within the JV. The appointment of a new CEO who conducts the customary strategic review prior to embarking on a more creative strategy could be well received by the market.
GPT guided for CY09 operating income of $347m, which we consider may be exceeded, and has forecast a distribution of 7.2cpu, subject to minor dilution by distribution reinvestment. Reflecting the short-to-medium term pressure of global economic deterioration on occupancy and rental income in the office, retail and industrial portfolios, our forecast growth in property revenue has been reduced and property expenses increased. Our forecasts of development profit and funds management fees have been reduced, reflecting the decreasing contribution of performance-linked fee income. Our valuation falls to $0.85, which is a heavy discount to NTA of 40.6% and provides a forecast distribution yield of 8.5% based on management guidance. GPT should only be considered by income investors willing to bear some capital risk in the short-term around 30cpu.
GPT Price at posting:
42.1¢ Sentiment: Hold Disclosure: Held
(20min delay)