Couldnt agree more. Like the freudian slip - "savage value" from...

Couldnt agree more. Like the freudian slip - "savage value" from the BNB JV!

Huntleys like it (for those that havent read it).....

Investment Rating
General Property Trust (GPT) is one of Australia’s largest AREITs with total assets of $13.97bn at December 2007, being a stapled security comprising a unit in the trust and a share in the management company. GPT has three inter-linked business streams, each based on investment property, being ownership, development and management with assets in Australia, New Zealand, Europe and the USA. GPT actively seeks to recycle capital with development properties providing stock for ownership by either the trust or third party funds managed by GPT, generating fees for GPT at each stage of the process. Earnings are grounded in relatively safe, steady growth revenue from the Australian investment property portfolio, though around 25% of operating income is sourced from riskier activities providing higher potential earnings growth but with greater volatility. Short to medium term capital growth may be expected to be volatile, being influenced by the time required for the market to regain confidence in GPT management’s ability to drive the riskier, non-investment property business activities. GPT should be considered by income investors willing to bear high capital risk in the short term.


Event

Initiation of coverage of GPT which offers exposure to ownership, development and management of investment property in Australia, New Zealand, Europe and the USA.

75% of the operating income of the trust is underwritten by a geographically and sectorally diversified $7.58bn portfolio of Australian investment property.

Earnings growth will be modest until the global property transaction environment improves allowing GPT to recycle assets, with short to medium term capital volatility expected.

Full Event Analysis

Impact

As one of the big four AREITs, GPT was traditionally a core AREIT holding. However, the diversification into non-property investment business streams created greater risk in earnings leading to an earnings and distribution down grade in July 2008 which adversely impacted confidence in GPT management.

Our fair value of GPT is $2.53 per unit, providing a distribution yield of 7.9% and a discount to NTA of 34.5%, with a WACC of 9.3% and a cost of equity of 10.45%. GPT should be considered by income investors willing to bear high capital risk in the short term.


Recommendation Impact
(Last Updated: 23/07/2008)
Initiating coverage with a BUY recommendation.


Event Analysis
We begin coverage of the GPT Group (GPT) which offers exposure to investment property ownership, development and management in Australia, New Zealand, Europe and the USA. Whilst GPT has a challenged balance sheet with a high level of debt, following the recent earnings downgrade the trust now offers 75% of FY08 operating income from low risk Australian investment property, providing an FY08 distribution yield of 14.4%. Following the earnings downgrade, the stock price plummeted from $2.46 to close at $1.39 on July 16 2008, offering a discount of 63.9% to the robust net asset backing of $3.86pu based on high quality property assets with relatively low revaluation risk. Suitable for consideration by income investors willing to bear high capital risk in the short term, our recommendation is BUY.

GPT’s business model is based on capital recycling through an own, develop, manage process with a strategy to diversify earnings by business type and geography, seeking to balance exposure to mature markets while accessing opportunities in new markets and so maintaining stable income through market cycles. The business model is premised on a sustained level of transactions whereby GPT owns or develops investment property assets which it then vends into GPT managed funds to which third party investors subscribe equity, with GPT earning a development profit and management fees at every stage of the transaction.

The ownership business stream provides 94% of operating income, comprising a high quality $7.58bn Australian office, retail, industrial and hotel/resort portfolio (75% operating income), a $795.7m interest in US seniors housing (2% operating income) and a $2.00bn investment in a joint venture with Babcock and Brown (17% operating income).

The Australian investment property portfolio is performing well, being diversified sectorally and geographically. The office portfolio comprises 20 premium and Grade A office buildings totaling 566,000sqm, being weighted to the robust Sydney market but with a substantial presence in Melbourne and Brisbane also. Office occupancy was 95.3% as at March 2008 with a weighted average lease expiry of 5.8 years by area. Office portfolio vacancy spikes in 2009 (approximately 13%), while office space markets remain under supplied indicating a low likelihood of lost revenue. The next spike is in 2016 (approximately 20%) with ample time for management to implement strategies to re-lease upcoming vacant space and so minimise adverse effects on revenue. Around 30% of the portfolio by area is subject to open market rent reviews in 2008 which augurs well for revenue growth given the current high rentals and low vacancy rates in the major CBD office markets.

The retail portfolio comprises 18 shopping centres and 8 homemaker centres totaling 1.2m sqm, principally located along the eastern seaboard of Australia. Shopping centre occupancy was over 99% achieving comparable specialty sales growth of 4.0%, with specialty sales strong at $8,779psm pa though occupancy costs were relatively high at 16.2% (December 2007).

Being largely well located, modern and of a high quality, the industrial portfolio includes business parks, having 95% occupancy and a weighted average lease term of 7.5 years (March 2008). The expiry profile is unusually low, with less than 10%pa by income expiring over the next five years, indicating revenue stability and sustainability.

Though only a small portion of the portfolio, the 2,200 room hotel/resort portfolio has performed poorly in the recent past. The portfolio includes one Sydney CBD hotel and resorts in Ayers Rock and the Great Barrier Reef. The resorts are generally high price point and relatively inaccessible, other than by air, attracting a high proportion of overseas visitors. Though occupying a leading position in the Australian nature based experiential tourism sector, lower inbound tourism and the strong A$ have adversely impacted occupancy which was only 68% in the year to March 2008 (72% previous year) and average room rate at $218, leading to reduced revenue. Whilst the situation is not expected to improve in the short term, the medium term outlook is more optimistic.

Earnings from the US seniors housing interests were reduced by 37.5% in GPT’s July 2008 earnings downgrade, following lower sales in the US housing market leading to reduced demand by seniors for retirement residences. GPT holds a 95% interest in 34 retirement communities in the New England region of the USA, which has the favourable demographic profile of an ageing population, managed by Benchmark Assisted Living in which GPT has a 20% interest. Whilst disappointing that the strategic move by GPT management into US seniors housing has faltered early, the level of investment is not material and the medium term outlook is more positive.

Earnings from the $2.0bn Babcock and Brown joint venture investment were reduced by 11.3% in the recent earnings downgrade and represent a much larger source of concern for the trust. The joint venture is principally invested in German residential (35.2%) and European industrial (22.2%) property. Following unitholder unrest at the lack of transparency in the joint venture, GPT renegotiated the investment period, fee structure and return targets, further fuelling unitholder concern that the previous basis was disadvantageous to GPT. GPT have now announced an intention to explore ways to accelerate the redemption of capital from the joint venture with a view to a staged return of capital from 2009. Whilst progressive exit from the joint venture will increase investor enthusiasm for the stock, it will also remove a current major barrier to takeover, merger or privatisation and so may put GPT into play in due course.

The development business stream, contributing 4% of operating income, had a strong start with successful retail, commercial and industrial development projects including a shopping centre at Rouse Hill, the expansion of Charlestown Square shopping centre, creation of a CBD shopping centre in Newcastle, office buildings at 818 Bourke Street Melbourne and workplace6, Sydney and industrial development at Quad 4 Homebush. GPT recently announced a flagship office development at One One One Eagle Street, within Brisbane’s ‘golden triangle’ precinct, comprising a 44 level tower of 62,000sqm for completion in the second half of 2011. Given the current low vacancy rate in the Brisbane CBD and prime, riverside location of the property, occupier demand is expected to be strong.

The sale of workplace6 to the GPT Wholesale Office Fund (GWOF) was a great example of how the business model can work in a buoyant market – generating a development profit for GPT together with development management fees and ongoing fund management fees from GWOF. Subject to an improvement in demand for funds management product, GPT has a substantial development pipeline with an estimated cost of approximately $4.9bn in the medium term.

The funds management business stream includes two Australian funds (GWOF and GPT Wholesale Shopping Centre Fund, GWSCF) and two European funds, GPT Halverton and the Hamburg Trust, comprising 2% operating income. The Australian funds management business was performing well but, in the recent earnings downgrade, GPT confirmed it had been unable to find investors to acquire its 20% interest in GWOF. The strategic move into European funds management appears to have been particularly badly timed, with the earnings downgrade confirming a forecast loss of $15.0m for FY08 and implementation of a cost cutting programme.

In addition to downgrading earnings and distribution for FY08, GPT also announced that future distributions would be paid from 90-100% of operating income only, so excluding development profits. Following the earnings downgrade announcement, S&P downgraded GPT’s credit rating to BBB with a negative outlook, though Moody’s maintained its Baa1 rating with negative outlook and on review for possible downgrade status. The trust has a well structured but challenged balance sheet, having 36.3% gearing with average debt maturity of 4.8 years, being 97% hedged at an average rate of 4.53% (December 2007).