Company Reports

Following the transition of coverage to a new analyst, we raise our fair value estimate for GPT Group by 3% to AUD 5.70 per security. A key driver of this upgrade is our more positive view on the funds management business. We lift our medium-term growth forecast for funds management net income to 2.5%, from 0% previously, reflecting our expectations of solid inflows from mandates and the impact of likely revaluations, which will increase the asset base. The group’s funds under management grew to AUD 22 billion in June 2024, from AUD 13 billion in 2019. Notably, GPT secured the Commonwealth Superannuation Corporation mandate of AUD 2.6 billion last year and the asset transition is expected to settle in the second half of 2024. We expect GPT to achieve longer-term inflows given its long-established brand, strong track record, and management expertise.

GPT’s strategy is to operate a diversified portfolio of high-quality property assets in Australia’s largest cities and to reshape exposure by taking advantage of structural tailwinds such as rising e-commerce and population growth. This is executed by divesting low-yielding assets, actively developing logistics sites, and replenishing landbanks. Today, the retail and office segments, including contributions from their respective funds management, each account for around 40% of the group’s funds from operations. Logistics contributes less than a quarter. In 2010, the retail/office/logistics split was about 60%/30%/10%. The gross lettable area of logistics sites has roughly doubled over the past decade, mostly on the eastern seaboard of Australia.

In line with our expectations, GPT Group reported funds from operations of AUD 0.16 per security and distributions of AUD 0.12 for the first half of 2024. Management reaffirmed full-year guidance, and we continue to forecast 2024 FFO per security of about AUD 0.32 and distributions of AUD 0.24, which is in line with guidance. This equates to a forward distribution yield of approximately 5%, which is attractive compared with the 10-year commonwealth bond yield of 3.9%.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

We retain our AUD 5.55 fair value estimate for no-moat GPT as we transition coverage to a new analyst. Shares trade around 21% below fair value. It remains one of Australia’s most diversified REITs, with around 35% of 2023 funds from operations coming from its retail or shopping center portfolio, a similar amount from office, 23% from industrial, and 8% from funds management.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

No-moat GPT Group posted a reasonable first-quarter update, with near full occupancy across its retail and industrial portfolio, but office leasing conditions declined 0.3% to 92%. However, GPT Group made progress during the quarter, with more than double the amount of office space leased than in the first quarter of 2023. We expect sluggish office conditions to eventually improve, driven by population growth, new transport infrastructure close to GPT’s assets, and less rival supply. In line with our full-year estimates, management reaffirmed its fund from operations of AUD 0.32 per security and distribution of AUD 0.24 guidance. GPT appears undervalued, trading at a material discount to our AUD 5.55 per share fair value estimate.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group to build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

GPT Group was listed in 1971, and internalized its management in 2005, severing ties with former manager and founder Lendlease. Its long history helped GPT Group to build a property portfolio that includes many well-known assets. For example, its retail portfolio includes Melbourne Central, one of Australia’s most productive retail assets. Its office portfolio includes stakes in Sydney’s Australia Square, Brisbane’s One One One Eagle St, and numerous properties in and around Collins St in Melbourne’s CBD. GPT Group’s retail and office portfolios each contribute about one-third of funds from operations. Another fifth comes from industrial property and a growing balance from funds and property management.

GPT’s 2023 annual result revealed funds from operations of AUD 0.31 per security and distributions of AUD 0.25, in line with our estimates and management guidance. 2024 guidance of AUD 0.32 includes an anticipated boost from one-off asset disposal, implying a 2% fall in 2024 FFO, excluding the asset sale. We assume a lower distribution in 2024 of AUD 0.24, also in line with guidance, with free cash flow likely to be weighed down by elevated office incentives. Incentives typically take the form of capital expenditure to entice office tenants to sign a lease. Incentives averaged an elevated 35% of office lease value over the half, and GPT Group expects elevated office incentives for the next couple of years, which seems likely given the new supply continues to arrive, and we estimate it will take several years to soak it up via demand growth.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

GPT’s decent first-quarter operating update adds confidence that our thesis is playing out. GPT screens as one of the more undervalued REITs in our Australian coverage, with the AUD 4.64 security price a circa 10% discount to our unchanged AUD 5.25 fair value estimate, compared with the broader property sector mostly looking fairly valued.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

GPT’s retail, office and industrial properties generate about three quarters of recurring revenue. Another 20% comes from funds management. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

No-moat GPT’s fiscal 2020 result came in ahead of our expectations. The REIT posted funds from operations of AUD 28.48 cents per security, exceeding our estimate of AUD 27 cps. Distributions surprised on the upside, totalling AUD 22.50 cps, against our estimate of AUD 19 cps.

There’s been little office leasing or transaction activity of substance in 2020, but a trickle of information reaffirms our unchanged fair value estimate for no-moat GPT at AUD 4.60.

GPT’s retail, office and industrial properties generate about three quarters of its recurring revenue. Another 20% comes from funds management, however we do not assume substantial growth from new fund launches or fund inflows for GPT. We expect growth in the funds management division will largely track the value of properties held in its fund vehicles. GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time.

GPT Group’s first-quarter operational update confirms our view of a challenged environment for retail property landlords. Total sales for tenants in the shopping centre portfolio were up only 1.3% in the year to end March, pointing to a significant slowing on the 2.4% growth for the year to December 2018. For the high rent-paying specialty tenants, operating performance was similarly weak. Trailing 12-month specialty sales growth was 1.9% at end March, versus 3.6% at end December 2018. Prepared comments from GPT that retail conditions remain subdued is quite an understatement, as it appears Australian households have significantly tightened the purse strings over the past three months. Against this backdrop of slowing sales, we don’t see GPT or other landlords orchestrating a rebound in rent growth. We’ve been factoring a soft outlook for retail rents in our forecasts for some time and continue to forecast rents rising by 2.3% over the longer term. This is roughly half the average fixed increase of 4.7% GPT has been negotiating on recently finalised retail leases. However, having a swag of leases with high fixed annual increases doesn’t tell the full story as to achieve this GPT needs to separately pay large inducements, or tenant incentives. In 2018, tenant incentives across the office, retail and industrial portfolio were AUD 61 million, equivalent to 10.6% of net rental EBIT.