Is GPT Being Too Ambitious?

This story features GPT GROUP. For more info SHARE ANALYSIS: GPT

-AUM target increase by $10bn
-New funds to be launched
-Total return target of 9%
–No timing for targets
 

By Eva Brocklehurst

Diversified listed property trust, GPT ((GPT)), has upgraded earnings forecasts and defined some new targets. Or should that be re-defined targets. The company is moving away from portfolio target weightings in each asset class and wants to increase Assets Under Management (AUM) by $10 billion, from the current $7bn. A total return on investments of at least 9% is the new target. The first priority is to launch a metropolitan office fund and an industrial fund. Brokers are a little sceptical, especially given the ambitious nature of the increase to assets under management and the lack of a timetable.

The strategy will allow GPT to be opportunistic in asset selection while maintaining the benefits of diversification in income. Target allocations were rigorously applied over the last few years as GPT reduced proportional exposure to the retail sector and raised exposure to industrial. Going forward, the allocations are likely to become a by-product of acquisition opportunities, in JP Morgan's view. Earnings growth is raised to "at least" 6% for 2013, but this is not that surprising for brokers. JP Morgan believes the upgrade and re-defined targets need to be seen in the context of operating income growth being at the lowest end of the large cap A-REITs at mid year. A turnaround was imminent and the guidance upgrade is supported by debt cost reductions and the buy-back, not an improvement in underlying real estate conditions.

Over time, UBS expects the market will reward the new strategy but at present there is concern about the timing and sourcing of assets. Macquarie does not find there's any change to the strategic direction and was not surprised that the company has homed in on growing assets under management, given the demand for real estate from pension and sovereign wealth funds. The existing GPT funds are very low geared and have significant acquisition capacity and this will be supplemented with the launch of new funds, starting with a metropolitan office fund and a logistics fund. There's no timing attached to the proposed targets so, for Macquarie, it's deal-driven and uncertain.

Medium term earnings will depend on what proportion of assets come from GPT's balance sheet, in UBS' opinion. The company has changed the goal posts in terms of short term performance incentives and Funds Under Management (FUM) targets and earnings could be diluted in the event of new funds being launched by assets (in particular logistics) from the balance sheet. For example, UBS maintains, if GPT were to launch an industrial fund of $500m in assets sourced from the balance sheet, assuming 25% was invested in the fund that had gearing of around 30%, earnings per share could be diluted by 2.7%.

To Deutsche Bank the emphasis on a total return target of over 9% looks similar to the previous CPI-plus-1% target. The relaxing of previous portfolio target weightings was not a surprise. Whilst GPT has demonstrated solid growth momentum within existing funds, the broker believes the expansion by $10bn in assets under management is substantial and progressive execution will be required before this will be reflected in pricing. Again the timing question is raised. Deutsche Bank believes the metropolitan office and logistics fund, a mixture of wholesale and retail investors, expected in 2014, could contribute over 30% of the total FUM growth but the rest of the expansion, ultimately to around $17bn, could take considerable time.

GPT's total return target will be measured as the distribution yield (on book equity) plus Net Tangible Asset growth, which GPT expects to range around 5-6% and 3-4% respectively. Assuming NTA growth of 3.5% implies distribution growth of around the same amount to meet the hurdle rate, according to Deutsche Bank's calculations. All up, it suggests subdued organic growth. Along a similar vein, JP Morgan suspects that, applying the current capital structure, GPT would need to fund a $1.7bn equity contribution and source $6.5bn from third parties to achieve the $10bn in AUM growth. To arrive at $17bn in five years FUM would need to grow more than double the rate it's grown over the last five years. Capacity constraints in direct market stock suggests to JP Morgan this is a long-dated target, or that acquisitions are the mainstay of the plan.

JP Morgan also has a long memory. GPT has set ambitious growth targets before, with some dire consequences. One of the differences this time around, and it's a new CEO setting the course, is that the Australian market is the subject of the target and there's no obvious desire to use leverage to achieve the aims. Nevertheless, GPT will also be competing with a range of aggressive acquirers of prime grade real estate.

On the FNArena database GPT has five Hold ratings and one Buy (Macquarie). The consensus target is $4.01, suggesting 8.0% upside to the last share price. The dividend yield on 2013 forecast earnings is 5.5% and 5.6% on 2014.
 

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