In line with our expectations, GPT Group GPT reported funds from operations (“FFO”) of $0.16 per security and distributions of $0.12 for the first half of 2024. Management reaffirmed full-year guidance, and we continue to forecast 2024 FFO per security of about $0.32 and distributions of $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%.

We retain our fair value estimate for no-moat GPT of $5.55 per security. The securities trade at a 14% discount to our intrinsic assessment at current prices, likely due to concerns over office market headwinds.

However, GPT’s high-quality office portfolio is relatively well-positioned to weather the cyclical downturn in the space. In addition, GPT’s income stream is well diversified, with its retail properties driving 31% of first-half FFO, office 24%, industrial 22%, funds management 10%, and the remainder from investments in its funds. In the half year, its funds under management grew to $22 billion due to new mandates, an increase of $2 billion from six months ago.

Office is currently the main weakness in GPT's portfolio. Compared with the previous corresponding period, FFO from the office portfolio fell by about 1%. This was driven by higher incentives offered to tenants, which rose to 43% of gross rent from 37% in the prior corresponding period (“PCP”), albeit still on par with the market average.

We expect office occupancy to hit 88% by the end of the year, slightly down from 90% at the end of December 2023. As the portfolio is skewed to Melbourne, where CBD office attendance is generally weaker than in other major capital cities, we project the recovery to be slow. Nevertheless, given the high quality of the portfolio, its lower-than-market vacancy rate, and existing tenants’ willingness to renew leases, we consider GPT’s office portfolio to be relatively more resilient to the office market downturn than peers.

Business strategy and outlook

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.

Industrial development projects led to a rapid increase in the contribution from that segment. The group acquired or developed more than AUD 500 million of industrial property from 2018 to 2022, with further projects in the pipeline. GPT launched its first industrial property funds management vehicle in 2020 and has added several projects to the mix since then.

GPT Group's committed development pipeline tapered in 2023, limiting GPT's financial outlay and risk. Though it still has a notable industrial pipeline with many of these projects likely with capital partners attached. It also has some large office projects that it could proceed with, giving the group some flexibility but depending on conditions in commercial property markets.

Retail property remains a large exposure, making up more than one third of GPT Group’s directly held property and its funds management assets. GPT Group has not been acquiring retail properties lately, limiting investments to refurbishments or redevelopments. Office comprises another one third of the property portfolio and two thirds of funds management assets. The group has several development opportunities, with the most significant being a potential redevelopment of Darling Park and Cockle Bay, which we expect will eventually create an entirely new precinct above Sydney’s western distributor. Though development is unlikely to start until conditions improve.

Moat rating

We assign no moat to GPT. Around 40% of its portfolio by value is retail property as of June 2024, mostly classified as either regional, super-regional or city center assets. They are typically major centers in their catchments and in long-established population areas, which makes it difficult for competitors to acquire the land and planning permission needed to develop a rival center. So we believe GPT’s retail portfolio is well insulated from competition from major physical rivals.

However, the threat from e-commerce will likely undermine the bargaining power of retail landlords, in particular those exposed to department stores. Many of GPT's centers have exposure to at least two department store tenants.

Even though the economy was not in recession, GPT experienced negative releasing spreads on its smaller specialty stores in the June 2019 half year, and barely positive spreads in the second half of 2018. GPT's retail assets largely returned to precoronavirus conditions in 2022, and in 2023 leasing spreads were comfortably positive.

We believe that more frequent and more substantial refurbishment will be required for department stores which will add to costs for GPT. However, this is offset by contracted rental uplifts, which drives up rents over the life of each lease. GPT is heavily exposed to supermarket tenants. This category will likely be affected by online sales, but not at the same rate as discretionary categories such as apparel.

We don't view GPT's industrial property as moat-worthy due to the large number of alternative sites, the speed that rivals can establish new facilities, and ease of tenants in moving locations. GPT has competitive advantages such as good sites, expertise, and access to capital due to its scale. Its funds management business might offer the ability to move completed developments off the balance sheet, freeing up capital, yet still earning management fees. GPT has an increasing exposure to industrial property, accounting for around 30% of its portfolio at June 2024, and is likely to increase above that due to acquisitions and developments.

GPT’s funds management business has moat-like characteristics given that exiting investors typically have to sell to another incoming buyer. Redemption facilities typically allow withdrawals once every several years where investors can vote to wind up the fund, with these facilities next triggering in 2026 for the retail fund and 2027 for the office fund.

Given that numerous rival funds have seen redemption queues, there is a risk investors could elect to wind up. However, GPT has diversified its funds management business, setting up a partnership to acquire and develop industrial assets with customer QuadReal, and in 2022 it won a mandate to manage retail properties for UniSuper. Existing capital in GPT fund vehicles looks secure for now, but there are risks at the 2026-27 mark, and new opportunities remain subject to competition from a wide range of rivals.

We consider GPT’s office portfolio, which is around 35% of its overall portfolio by value at June 2024, as high-quality. The office assets are typically premium or A-Grade, and nearly all in either the Sydney or Melbourne CBD. GPT has small exposure to Brisbane and Canberra, where supply can be added more readily, but GPT owns two of the best sites in Brisbane.

High grade CBD offices are somewhat supply constrained due to a combination of planning hurdles, lack of suitable sites, geographical impediments, and a tightly controlled market. Rational new competitors are deterred from entering the market unless they are confident the new supply will not undermine returns for landlords.

GPT is a large player, owning and managing approximately 10% of Sydney and Melbourne's prime CBD office market. Alongside other dominant landlords, the CBDs are tightly held, giving GPT bargaining power in rental negotiations. However, this has been undermined by the trend toward hybrid working and a backlog of new supply from projects that commenced some years ago when supply was tighter. We do not believe that this segment on its own is enough to warrant awarding GPT with an economic moat.

All up, GPT has a high quality property portfolio, but will largely be a price taker than a price maker in the markets in which it operates.

GPT bulls say

  • GPT has several development plans that are near shovel-ready.
  • GPT’s office, industrial, retail, and funds management businesses diversify income sources, and it should see benefits as the economy and central business districts recover from covid-19 and higher interest rates.
  • Unlike rivals, GPT's strong balance sheet means it has the flexibility to proceed with development projects when it chooses to.

GPT bears say

  • GPT has exposure to retail department stores, one of the most hard-hit tenants in the entire property sector.
  • Capitalization rates on property still haven't reflected the full rise in interest rates, and despite some property price falls, could further increase.
  • Office valuations face structural threats from hybrid working and rising interest rates. Industrial valuations could be vulnerable if supply chain and trade challenges are resolved sooner than the market expects.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

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