GPT Group: Result 2015

You have to be careful what you wish for. In GPT's latest result, management was complaining about high property prices, but you'd have to think the alternative would be worse.

The specific problem for GPT – such as it is – is that intense competition for quality property assets is making it hard for its funds management division to find investments. That in turn will limit income growth in the future.

The other side of the coin, though, is that higher prices have boosted fund performance. So while funds under management rose by only 5% in 2015, performance fees helped lift the division's operating profit by 37%.

In relation to its directly owned assets, ‘a measured increase in development activity' will help growth and compensate for potential minor asset sales. Notably, whilst the company's development pipeline potentially includes 3,000 apartments at its Camellia estate in Parramatta, Sydney and another 1,000 apartments next to its Rouse Hill Town Centre retail asset, new chief executive Bob Johnston doesn't intend to establish a residential development business.

We were glad to hear that. A significant foray into residential development would increase the risk profile of GPT, which has only recently returned to being a high quality and conservative listed property trust after its near-death experience during the global financial crisis. Nevertheless, the company's development activity will increase as its new leadership looks to grow the investment portfolio and this does elevate GPT's risk.

Slower growth forecast

While distributable profit rose 11% (see Table 1), most of this was due to the higher funds management income along with lower interest costs (helped by the redemption of its exchangeable securities early in 2015). Management forecasts lower distributable profit growth in 2016 of 4-5%.

As has become a feature of the listed property sector, further tightening of capitalisation rates resulted in most of GPT's properties recording healthy increases in value. The value of its investment portfolio of shopping centres, office towers and logistics facilities improved by 4%.

GPT has been able to negotiate improved terms on renewed and new leases in its shopping centres compared to those already in place. This is a positive sign, as in 2015 leases were being negotiated at terms 1.5% worse. With the average specialty store lease expiring in 2.5 years, management will hope this trend continues as there is plenty more re-leasing to come.

Occupancy levels in its office properties improved five percentage points to 96% due to increased demand from the technology sector and small tenants. Led by Amazon and Twitter, technology companies represented around a quarter of all new leases in 2015. Office like-for-like income grew by 6%.

GPT's logistics division took advantage of the strong residential property market to offload three assets for $112m, a 44% premium to book value.

The stock has gained 14% since GPT Group: Interim result 2015 (Avoid – $4.32), which puts it on an unfranked forward distribution yield of 4.7% and a 14% premium to its adjusted net tangible assets (after taking into account its funds management and development businesses). That looks expensive and we continue to recommend you AVOID.