Growthpoint Properties Australia (ASX:GOZ) has an extensive investment portfolio of Australian industrial properties. GOZ has no property stgelopment or funds management businesses.
GOZ was formed through the restructure and recapitalisation of Orchard Industrial Fund (OIF) in August 2009. The restructure involved:
• placement of $55.6 million of OIF units at $1.60 each to Growthpoint Properties Ltd, a South African listed property investment company;
• management internalisation and stapling of shares in Orchard Management Ltd, the responsible entity, to units in OIF to form a stapled security;
• broadening of OIF’s investment mandate from only industrial property to include retail and office properties;
• $144.4 million rights issue to all security holders at $1.60 per security, fully underwritten by Growthpoint Properties Ltd; and
• A name change to Growthpoint Properties Australia.
Following the restructure, financial leverage reduced from 74% as at 30 June 2000 to 46% on a pro forma net debt to total asset basis.
GOZ’s portfolio currently comprises of 24 Australian industrial properties as tabled below.
The fundamentals of the property portfolio are strong with:
• 98% occupancy
• 68% of rental income from a blue chip tenant Woolworths
• weighted average lease expiry of 11 years
• no lease expiries until 2012
• 93% of leases are subject to fixed annual rental increases of 2.5% – 4% p.a. The remaining leases are subject to CPI increases
GOZ’s pro forma balance sheet – post recapitalization is presented below.
Source: Growthpoint Properties Australia 2009 annual report, company announcements
GOZ negotiated a $480 million secured debt facility expiring on 30 June 2012 from National Australia Bank and Westpac with redraw options. Hence, debt refinancing isn’t an issue for another two and a half years.
The key covenants are:
• default loan to value ratio (LVR) of 70% to 31 December 2010, reducing to 65% thereafter
• if the LVR is between 60% – 65%, no redraw is available
• if the LVR exceeds 65%, all available cash flow must be used to repay debt
• minimum interest cover of 1.4 times
We expect GOZ will be comfortably within covenant limits with forecast net debt to total assets of 46% and interest cover of two times.
Using management’s forecast, FY10 net property income of $63.2 million and a weighted average capitalisation rate of 9%, which is conservative given the quality of the assets, we estimate the net tangible asset per share will be $2.08.
In StockVal, we have adopted a required return of 13%, which is appropriate given the relative certainty around rental income offset by the illiquidity of GOZ units. The adopted profitability forecast of 11% is based on long term total return (capital growth plus distribution income) from investing in Australian industrial real estate investment trusts. Using these inputs, StockVal estimates a value of $1.65 per unit for GOZ.
This valuation is a 20% discount to the estimated NTA and suggests a current market price of about $1.55 is attractive for investors. Furthermore, GOZ has low gearing, the backing of a large South African parent, protection against inflation from fixed annual rental increases and forecast distribution of 14 cents per unit or a yield of 9%. There is the potential for some portion of the distribution to be tax deferred.
Investors should be cognisant of the illiquid nature of the units given that Growthpoint holds 76% of issued capital. Therefore, at this time, the discount to NTA of the current price and our valuation is appropriate. However, we do expect the Fund to grow in time as it utilizes its freedom to invest across different property categories and it accesses further capital from the market and its major shareholder.
Clime Asset Management uses StockVal.
Other articles in this week’s newsletter