Dexus snaps up GPTs MLC Centre

Dexus and its wholesale property fund have jointly bought GPT's 50 per cent share of MLC Centre for $800m; a 3% premium to book value. With the cash, GPT will reduce gearing and redeploy funds into its development pipeline, in particular new office towers in Melbourne Central and Parramatta. Dexus' gearing, on the other hand, will increase - as it will be funding the purchase by issuing 7-year convertible notes. Holders of the convertible notes will be able to convert their notes into Dexus shares at a strike price of $15.05 per security.

The sale will give Dexus full control of one of Sydney CBD's A-grade office towers, comprising significant retail space, a theatre and 300 car spaces. It can now accelerate its retail development plans within the building, and in an office market tight on supply, is likely to achieve significant rent increases in the coming years as a number of leases expire.

However, both stocks now look expensive, with Dexus and GPT offering forward distributable profit yields of 4.2 and 4.3 per cent respectively. GPT has a high weighting to retail space - of mixed quality - so we're unwilling to lift our sell price for now. With the stock hovering only slightly above it, we'll wait for some clear space before downgrading, but members with higher returns expectations may not want to wait. For now, HOLD.

As for Dexus, a tight office market means a number of their properties are under-rented, which should be supportive for rental growth. Adding long-term growth expectations of 2-5 per cent to its yield, it's offering a theoretical long-term return of between 6 and 9 per cent. That's no bargain - but it may be enough for some members with lower return expectations. That's why we're taking the opportunity to nudge up our price guide, with the Buy price rising to $7.50 and Sell price to $13.50. HOLD.