GPT reveals cuts, writedowns & downsizing

GPT has slashed its full year income forecast by 26% from $633 million to $464 million and warns that its Joint Venture Fund with Babcock & Brown will "downsize significantly" over the next 18 months.

In addition, GPT also expects to write down the value of its European funds management business.

Yesterday, GPT reduced its earnings-per-share forecast to 21 cents for the year ending December 31 2008 and its full-year distribution to 20 cents per share, compared to 28.9 cents in 2007.

The downgrade saw GPT shares fall 14.63% or 36 cents to close at $2.10. The fall slashed more than $600 million off the market capitalisation of GPT from $5.41 billion last Friday to $$4.61 billion yesterday.

GPT’s chief executive Nic Lyons said the revised earnings expectations as a result of the internal review are clearly very disappointing for all stakeholders.

“However, we believe that this updated guidance is appropriate at this half-way mark of the financial year, owing to a persistently challenging operating environment. We expect difficult conditions to continue for at least the second half of this calendar year,” he added.

As part of the review, GPT has decided to defer initiatives such as the partial selldown of its 40% interest in the GPT Wholesale Office Fund; flagged asset sales, including properties owned by the JV Fund; and the proposed launch of various funds by the European funds management platform.

GPT has also adjusted development profits for 2008 to reflect no further development profits for remainder of the year. This includes a deferral of the sale of the recently completed development at 818 Bourke Street in Melbourne, previously assumed to occur in the second half of 2008.

Lyons said income guidance for the JV Fund in 2008 has been reduced to $125 million. The group’s negotiations with Babcock & Brown to sell the assets are continuing.

“Market transaction activity is currently at abnormally low levels. Nonetheless, the JV Fund is and will continue to look to undertake prudent asset sales as market conditions allow. As there is long term debt in place in the JV Fund and the income yield from the JV Fund assets exceeds the cost of that debt, the JV Fund is not under pressure to sell assets.

“Nevertheless, based upon current market conditions, we expect the JV Fund to be materially downsized between now and December 2009, at which time we anticipate the JV Fund will begin a formal realisation period, due to the triggering of an ROE target related termination provision,” he added.

GPT’s European funds management platform consisting of GPT Halverton and an 80% ownership interest in Hamburg Trust is also not performing to earlier expectations, resulting in deferral of new fund launches.

“GPT Halverton is not correctly structured to operate in the current environment. Accordingly, GPT intends to reduce GPT Halverton’s annualised cost base by approximately 30% during the third quarter of 2008, with the aim of moving the business to a breakeven position from mid-2009,” he added.

Overall, GPT expects a writedown in the value of the goodwill component of the European funds management platform.

GPT’s exposure to the United States seniors housing has not delivered either and occupancy has fallen to 89% versus 92% in 2007.

Overall, the review as well as higher interest costs will result in an increase over the group’s corporate costs to $275 million.

And yesterday, Lyons said GPT is revamping its distribution policy and will no longer distribute development profits.

“In the current environment we believe it is appropriate to retain development profits earned, given their lumpy nature and unpredictable timing.

“GPT regards this payout policy as meeting the requirements for a sustainable business model, and as beneficial to the long term earnings growth prospects and financial flexibility of the group,” he added.

GPT will now distribute approximately 90-100% of other operating income depending on the composition of the earnings and capital management strategies at the time. It has already paid 7.2 cents per stapled security in the March quarter and expects to pay a further 4.2 cents for the three months to June.

On the other hand, Lyons said GPT’s headline and look through gearing remains comfortably. As at December 2007, headline gearing was 36.3% and look through gearing was 46.8%.

Only $100 million of refinancing is required for the remainder of 2008, with 2009 maturities of approximately $700 million, and GPT has sufficient undrawn facilities available to meet these refinancing requirements.

Lyons said GPT is looking to selectively dispose of non-core assets and return of capital from the JV Fund, which is expected to see GPT’s look through leverage move to below 40% over time.

“GPT remains committed to its strategy of ownership/management/development of high quality real estate. We continue to believe this is the optimal business model to deliver long term value to investors over the market cycle.

“GPT’s high quality Australian retail, office and industrial property portfolios which comprise the majority of GPT’s total asset base, have stood the test of time. We expect the quality of these assets to continue to hold GPT in good stead,” Lyons concluded.

GPT’s half yearly results are scheduled for announcement on August 27.

Australian Property Journal