Stock: GPT Group
Market Cap: $4.1bn
GPT has been to the brink and back. Being Australia’s oldest and most well established listed property trust, its misfortunes over the last 6 months have represented all that was wrong with the local property trust sector. Listed Property Trusts (LPT’s) were once a ‘boring’ and ‘defensive’ part of the market, reserved for conservative yield seeking investors. However the cardigans were left behind when a trend towards using additional debt to fuel extra returns became commonplace. The returns were typically supercharged by funding higher risk construction projects, blurring the lines with LPT’s traditional role as rent collectors.
GPT has been no exception. Originally spun out of Lend Lease in 1971 to house and manage property assets, its downstream manoeuvrers over recent years have destroyed decades of shareholder value. In recent months the stock ebbed to all time lows, 95% below its highs. Although it has since staged a rebound, the current unit price looks no different to that published in 1974. So should existing shareholders jump ship while they still can? Or are we finally staring at a once in a life time value opportunity?
Unfortunately, the company has already played that line, when it raised $1.6bn in November last year. Priced at 60c, the raising was a heavy 46% discount to the prevailing share price. Amid the capital raising rush over the last 12 months, this discount was only surpassed by one other company (Goodman Group – another indebted property trust). However the funds were desperately needed to pay down due debts with the discount indicative of the lengths required to add some sort of stability.
Touted as the opportunity of a lifetime, management sold the deal to investors by predicting the stock would retain a net tangible asset (NTA) backing of $1.56 per share under a ‘bad case’ scenario. With potential upside of over 100% on offer, who could have refused? The marketing strategy proved a success, with the funds raised providing some respite from bankers – but only temporarily.
Although gearing (debt to assets) fell from 47 to 42%, the reduction was not nearly enough for bankers in this ‘brave new world’ of tighter lending standards. And over recent months, in addition to management’s ‘bad case’ scenario actually playing out, shareholders have been dealt another cruel blow – further dilution. With asset sales having a limited impact on its debt load, the company has been forced into another jumbo capital raising in the order of $1.7bn. Priced this time around at 35c (a 26% discount to market), shareholders may be forgiven for being ‘once bitten twice shy’.
The $1.56 NTA backing flaunted to investors last November is set to be severely eroded. Following this latest raising, the company’s NTA forecast has been revised to 86c per share. How can seemingly ‘bricks and mortar’ assets change so quickly? The answer is dilution. Issuing shares at such large discounts erodes existing shareholder value. However when the company’s survival is at stake, shareholders have few alternatives but to salvage what they can.
In GPT’s case, shareholders have opted for survival. The institutional component of the deal, which accounts for the bulk of the money ($1.4bn) has been completed, and the $300m retail offer is being finalised. As painful as they have been, these two recent capital injections combined with $650m worth of asset sales mean that GPT stands a good chance of survival. GPT now has the liquidity to meet looming short term debt commitments until the end of 2010 and continuing asset sales will further shore up the balance sheet as the company has revised its strategy to focus on its Australian portfolio of properties. Debts of $2.3bn will remain, but the company’s gearing level will now fall from 42% to below 20%.
We suspect this level brings GPT well ‘out of the woods’ with regards to its bankers. So with a new management team at the helm, the risks for value investors canvassing the stock appear considerably lower. We don’t expect it to return anywhere near its previous heights anytime soon, however buying at a generous NTA discount could prove fruitful. As such discounts remain very common across the sector property trust sector, we don’t see a need to rush in just yet. Until a catalyst emerges that could close the discount, we see the stock as a ‘hold’. But we will be keeping tabs on the fallen giant. Its improving outlook provides a handy yardstick of the overall LPT sector’s health.
Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.
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