GPT Group is increasing its focus on office and logistics assets. Brokers welcome the trend and believe the development pipeline will be a key to future growth.
-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 GPT Group ((GPT)) and more is expected as the REIT's focus on these segments increases. GPT will be developing assets with an end value of around $1bn in 2020.
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 $2bn, of which office and industrial comprise 85%.
There are now $662m in projects underway and this is expected to reduce the weighting of retail in the portfolio, which is targeted at 40% versus the current 43%. The office expiry profile has been substantially de-risked, to 17% from 29%, and logistics to 8% from 21%.
Morgan Stanley believes this is one aspect the market has under-appreciated about GPT. Around $300m in new facilities will contribute to 2020 earnings and rental income for this division should increase by around 20%.
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, UBS agrees leasing success across this aspect of the portfolio will mean GPT is well-positioned to refine guidance higher throughout 2020.
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 Qube Holdings' ((QUB)) Moorebank development. Meanwhile, the development of Cockle Bay wharf is also expected to be ready to commence in 2022 with the company aiming for a 40% pre-commitment before starting.
Retail weakness resulted from a combination of a contraction in leasing spreads and a decline in cinema turnover rent. Morgan Stanley still finds this challenged sector too large as a proportion of assets and retains an Underweight rating.
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 $6.21, signalling -2.6% downside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.3% and 4.5% respectively.
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