-Office and industrial now comprising 85% of development projects
-More speculative development in industrial/office in NSW and Victoria
-Multiple headwinds for retail income
Office and logistics assets paved the way for strong income growth in 2019 for
First-time guidance for 2020 is for growth of 3.5% in distributions, stemming from the ramp-up of logistics acquisitions and development. Comparable income growth of 3.5% in 2019 was driven by a 6.2% rise in office, 3.3% in industrial and 1.2% in retail. Development projects now total
There are now
Credit Suisse agrees that not enough focus has been placed on the commercial development. Risks to forecasts and valuation include unexpected vacancies and greater-than-forecast variations on leasing spreads or development capital expenditure.
With a strong balance sheet and fairly predictable earnings, the broker finds the stock fairly valued. Citi, too, assesses the shares are not cheap but expects guidance will help support the future performance.
Citi highlights that a small beat on expectations matters in the A-REIT sector, with the stock heading 2.8% higher on the 2019 results. Guidance for 2020 is well ahead of expectations and the broker emphasises the company's tendency to be conservative.
With office and logistics continually surprising to the upside,
Developments
The company is undertaking more speculative development in NSW and Victoria, given tenant demand, while reducing exposure to its office fund (GWOF), now owning 22.9%. GPT, Macquarie believes, is unlikely to participate in the equity raising of GWOF.
The broker also notes notes media speculation that GPT may be a potential acquirer of the
Retail
Retail weakness resulted from a combination of a contraction in leasing spreads and a decline in cinema turnover rent.
Macquarie observes there are multiple headwinds for retail income and incentives have increased. On the positive side, tenure of leasing deals is unchanged. However specialty sales growth of 0.7% over 2019 indicated a flat second half.
GPT is hopeful of a recovery in 2020 but Macquarie believes this is unlikely to be of material assistance to the segment and retail valuations will remain under pressure.
Of note, in respect of its 45 retail tenancies a large number are affected by administration. Of these, 10 have closed and there is a potential for a further 10 to shut down. The level of administration is slightly higher compared with 2018 and 2017.
While GPT's retail weakness missed even its bearish forecasts, Citi warns offshore retail portfolios have persistently surprised on the downside, despite the market being well aware of retail headwinds.
There are four Hold ratings and two Sell on FNArena's database. The consensus target is
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