GPT Group: Interim Result 2014

GPT Group (GPT) has announced its interim result (it has a calendar year end) with its preferred measure of underlying profit, Funds From Operations (FFO), remaining flat at $224m. Comparisons with last year are complicated by property sales and acquisitions, but comparable income from the retail portfolio increased 2.6% and for the office properties it fell 3.1% due to higher vacancies. An interim unfranked distribution of 10.5 cents was declared (ex-date already passed), up 4%, which we'd estimate puts the company on a 5.2% yield.

GPT has targeted strong growth from its funds management and logistics businesses, but its retail and office property portfolios still comprise 80% of its $7.7bn property portfolio. To further the company's goal of reducing the percentage of its portfolio invested in retail in favour of office and logistics, the Erina Fair and Fortitude Valley shopping centres were sold for a combined value of $500m on estimated capitalisation rates of 6.2% and 7.9%, respectively. That caused an 11.4% fall in retail operating income, but on a like for like basis retail income growth was 3.1% as there's barely a vacant store. Anchor tenants, such as Myer and Coles, increased sales by a paltry 0.5%, while specialty tenants, which provide the cream of GPT's profits, posted a 2.7% increase in sales.

If the chief of South African group Woolworths (which recently acquired David Jones) is right, sales at anchor tenants like David Jones are about to enjoy a resurgence. We're not as confident and expect most of GPT's growth to come from acquisitions and developments. Unfortunately 'acquisition opportunities are scarce' due to high property prices, low interest rates and intense competition, so chief executive Michael Cameron is focusing on incremental developments such as the $210m expansion of regional shopping centre Wollongong Central. The retail portfolio’s 5.96% capitalisation rate is now the lowest it's been since June 2008, suggesting growth in net tangible assets will be modest unless interest rates fall further.

Office rents and occupancy rates are under pressure around the country, particularly in Western Australia and Brisbane where new developments have been completed right as the mining sector has slowed. GPT's office portfolio suffered a 7% fall in operating income to $68m, due to further lease expiries at Sydney's landmark MLC Center. It currently has a 32% vacancy rate but, once it has shiny new premium offices smack bang in the middle of the city following an $83m facelift due for completion in 2017, occupancy rates should drastically improve. GPT is also coincidentally spending an additional $83m on more luxury retail floor space and expanding the food court. Like the retail division, the office portfolio's average capitalisation rate of 6.56% is the lowest it's been since June 2008.

Once $200m of developments are completed by early 2015, GPT will have doubled its logistics portfolio to $1.5b since 2012. The logistics (or 'industrial') property sector is booming thanks to online shopping and increasingly sophisticated supply chains. Due to acquisitions and developments, logistics operating income increased 16% to $43m. On a like for like basis growth was only 1% due to Mars vacating GPT's Somerton property, but would've been 3% otherwise. The company still has a significant land bank to develop but growth will slow from its recent frenetic pace.

Funds business

GPT's funds management business continues to grow, with the GPT Wholesale Shopping Centre Fund (GWSCF) and GPT Wholesale Office Fund (GWOF) increasing combined funds under management (FUM) by 18% to $8.4b chiefly due to acquisitions that will be funded by an upcoming capital raising. Management ultimately hopes to have $17b in FUM to increase management and performance fees, which increased 60% to $16m compared to the same period last year.

GPT plans to launch a Metropolitan Office fund later this year, which, in contrast to its unrivaled portfolio of cloud ticklers, will invest in suburban and CBD-fringe office buildings. A logistics fund will follow as soon as suitable assets can be found. With property prices so high we recommend you steer well clear.

Debt

GPT’s underlying gearing (measured by net debt to total tangible assets minus cash) remains conservative at 27%, and interest expense fell 5% due to a decrease in the average interest rate paid to 4.81%. GPT was also able to extend its average debt maturity to six years and bought back 11m shares for $41m, incrementally reducing shares outstanding by 0.6%. The company only purchased the shares at a small discount to NTA and given property prices are inflated by low interest rates the buyback is not adding value.

After its near death experience during the GFC, GPT is now the pillar of reliability, quality and conservatism that it used to be. However, with its shares offering a low unfranked yield of 5.2% and trading at a 7% premium to NTA, there are plenty of other stocks we'd prefer to own. The share price is up 10% since GPT Group: Interim result 2013 from 13 Aug 13 (Sell – $3.73) and we're sticking with AVOID.