GPT saw 1H22 FFO increase +8% yoy, despite the ongoing impacts of Covid-19 pandemic

Investment Thesis:

Improving underlying conditions, although some uncertainty remains.
Solid portfolio across Retail, Office and Logistics but short-term risk around valuations and property fundamentals due to Covid-19.
Diversified with Funds Management business generating income.
Balance sheet strength with gearing ratio at 28.2%, well within target range of 25-35%.
Strong tenant demand for the GPT east coast assets.

Key Risks:

Breach of debt covenants.
Inability to repay debt maturities as they fall due.
Deterioration in property fundamentals, especially delays with developments.
Environment of expected interest rate hikes.
Downward asset revaluations.
Retailer bankruptcies and rising vacancies.
Outflow of funds in the Funds Management business reducing GPT’s income.
Tenant defaults as the economic landscape changes.

Key Highlights: FY22 outlook – FFO guidance upgraded to higher end of prior range. Management expects: FFO of ~32.4cps, up +12.4% y/y vs prior guidance of 31.7-32.4cps.

Distribution of 25cps, up +7.8% y/y.
Cost of debt to increase y/y with further increase in FY23 driven by increase in cash rate from RBA.
Retail sales growth to moderate, which combined with fixed rental increases and positive leasing demand should keep good momentum across the retail portfolio.
Office leasing volumes to improve.
Logistics portfolio to benefit from strong rental growth, partially offset by increased development costs amid escalation in construction costs.
Capital management. Distribution per security of 12.7 cents, down -4.5% y/y largely as a result of an increase in leasing incentives, equating to a 100% payout of operating FCF, up +10bps y/y.
Ample liquidity of $1,124m, up +20.3% over 2H21, held in cash and undrawn bank facilities.
Strong balance sheet with gearing of 27.3%, down -90bps y/y and towards the lower end of management’s gearing range of 25-35% and investment grade credit ratings of A (negative)/A2 (stable) by S&P/Moody’s.
Debt profile remains 71% hedged. To address the impact of rising interest rates, management increased hedging levels substantially in late July, resulting in the Group being 71% hedged on drawn debt for the next 2.5 years at an average rate of 2.8% (fixed hedge rate for FY22 at 1.7% and increases in FY23 to 2.6% for 80% of current debt). Management expects all-in cost of debt to be in the low 3% range in FY22 and increase to the low to mid 4% range in FY23 with a high level of hedge protection in place.
1H22 results summary. Funds from Operations (FFO) increased +8% y/y to $326.5m, driven by a +3% y/y increase in Retail, +10.7% y/y increase in Office, +20.8% y/y increase in Logistics and +15.1% increase in Funds Management, partially offset by +22.1% y/y increase in finance costs amid higher debt from acquisitions and developments and +13.8% y/y increase in corporate overheads due to higher technology and reorganisation costs and FFO per security increased +9% y/y to 17.04 cents.
NPAT declined -30.3% y/y to $529.7m primarily due to investment property valuation increases of $219.5m, down -53.5% y/y.
Net Tangible Assets (NTA) increased +2.8% over 2H21 to $6.26 per security, driven by revaluation gains for both the Logistics and Retail portfolios primarily due to rental growth and development completions.
12-month total return was 10.8%, reflecting an FFO yield of 5.2% and a capital return of 5.6%.
Operating cashflow declined -6% y/y to $271.8m and FCF declined -4.6% y/y to $243.3m, driven by a higher amount of lease incentives paid in Office.

Company Description:

GPT Group (GPT) owns and manages a portfolio of high-quality Australian property assets, these include Office, Business Parks and Prime Shopping Centres. Whilst the core business is focused around the Retail, Office and Logistics, it also has a Funds Management (FM) business that generates income for the company through funds management, property management and development management fees. GPT’s FM business has the following funds, GPT Wholesale Office Fund (GWOF – A$6.1b) launched in July 2006, GPT Wholesale Shopping Centre Fund (GWSCF – A$3.9b) launched in March 2007 and GPT Metro Office fund (GMF – A$400m) launched in 2014.

(Source: Banyantree)

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