A slump in retail rental income has impacted heavily on GPT Group but the proportion of office/logistics income and development is rising as a counter weight.
-New distribution policy dependent on rental collections
-Retail leasing remains on similar terms to before pandemic
-Logistics occupancy/development the bright spot
The retail portfolio of GPT Group ((GPT)) weighed heavily on the REIT's first half results as the pandemic cut a swathe through business operations and caused significant disruption to rental collections. The company has cited a slump in retail income because of business closures and operating restrictions, reporting a -$75.5m hit from pandemic-related rental relief.
Morgan Stanley, along with several other brokers, suspects GPT has been risk averse with its accounting, conservatively assuming that only $13m of uncollected rent will be recovered and the remaining 87% either waived or lost. This conservative assessment suggests scope for some upside although, while the pandemic is troubling for 2020, the longer-term impact is also debatable, Citi adds.
First half free funds from operations of $244.5m were -22% below the prior corresponding half. The trust expensed $33m in credit provisions against rental income contractually due but not yet received. Across the combined portfolio $35m of provisions were raised against $49m in rental income owed. This is in addition to $52m in rental abatements either agreed or expected.
Management has reiterated a new distribution policy of 95-105% of free cash flow. Hence, a second half dividend is likely but will depend on the extent of rent collections over the rest of the year. No other 2020 guidance was provided given the uncertainty.
Despite only collecting 81% of first half rental income, GPT delivered a distribution that equates to an annualised 4.8% yield at current prices. Gearing is on the rise, given a decline in asset values, but Macquarie still expects the balance sheet to remain strong and that will allow the trust to pay a final distribution.
Morgan Stanley also notes the cost of debt came in at 3.1% for the half and is expected to stay low throughout the rest of 2020 while Goldman Sachs estimates GPT would be able to withstand a further -26% deterioration in the value of its underlying real estate holdings before reaching the upper end of the 25-35% gearing range.
Customer numbers rebounded strongly from the April lows and are now within 15% of pre-pandemic levels for the portfolio outside of Victoria. Foot traffic is recovering and Macquarie highlights the online leakage witnessed at the peak of the national lockdowns has also started to reverse.
On the positive side, day-to-day retail leasing was on similar terms to before the pandemic. Valuations fell -10.5% but still reflect 2.7% market rental growth, which Citi considers is very optimistic.
The company has also confirmed there will be no change to the structure of retail leasing deals negotiated since the onset of the pandemic. This suggests to the broker that deal structures will be maintained on weaker prices and lower volumes.
Ord Minnett continues to expect retail income will stabilise at 85-90% of 2019 levels although defers cash flow stability to the second half of 2022 to reflect the company's high exposure to Melbourne, noting Melbourne Central represents 25% of the retail portfolio. Potential developments at Melbourne Central and Rouse Hill in Sydney are on hold.
The Melbourne shopping centres also attracted Morgan Stanley's attention, as Melbourne Central has collected just 45% of its rent over the last six months. More than 40% of retail income arises from Melbourne Central and Highpoint and, coupled with the second lockdown, the broker finds it difficult to envisage how the December half year could be materially stronger than the June half.
Macquarie agrees the exposure to Victoria makes for heightened retail risk. As of the past weekend (August 7-8) foot traffic was down -80%. Still, retail development has decreased by -48.6% since December and exposure to Victoria has reduced while exposure to New South Wales has increased.
The company has pointed out vacancies in the office portfolio rose to 5.6% as of June, from 1.7% in December. With a large number of tenants working from home the change to any requirements post the pandemic remains unclear, Citi points out. Incentives are rising and risks are skewed to the downside as a result.
The largest contributor to vacancies was the departure of Deloitte from the CBW complex in Melbourne. Broadly, incentives in recent leasing deals within the office portfolio have risen to the mid-high 20% range compared with an average of 17% in the first half. On a positive note, only 9% of the portfolio expires by the end of 2021 and the future development pipeline for office has increased by 39.5% since December.
Goldman Sachs concludes a material stepping down of net effective rents over the next two years will affect all office landlords. given rising vacancy rates in Sydney and Melbourne.
Occupancy across logistics was in stark contrast, rising to 99.8% in June from 95.7% in December. Tenant interest remain strong for developments currently underway and Macquarie notes a $1bn development pipeline that should assist in the shift in asset mix towards this segment. Logistics valuations were up 2% in the half and another $129m in assets remain under construction.
Goldman Sachs, not one of the seven brokers monitored daily on the FNArena database, has a Buy rating with a $5.32 target while the database has five Buy ratings and one Sell (Morgan Stanley). The consensus target is $4.50, suggesting 16.0% upside to the last share price. The dividend yield on 2020 and 2021 forecasts is 5.1% and 6.3%, respectively.
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