Sydney, July 9, 2008 (ABN Newswire) - Securities in GPT took a pounding for a second day yesterday after Standard & Poor's cut its credit rating in the wake of its earnings and distribution downgrades for 2008.
The securities fell to new all time lows of $1.87, and touched a day's low of $1.85, a drop of more than 10%. The 20.5c fall took the two day drop since the downgrade to more than 56c.
That's a fall of 25% on the closing price last Friday. The securities have fallen 55% so far this year and judging by comments yesterday by broking analysts, there could be some more left in the tank.
Some analysts expressed concern about the performance of GPT and other trusts in 2009.
S&P cut GPT's credit rating one level to BBB, the second-lowest investment grade ranking, from BBB+.
GPT joined Valad Property Group and Mirvac Group as Australian real estate investors who have cut in the past three weeks in the wake of the credit crunch around the world.Mirvac shares fell 12% yesterday. Stockland was down 7.5% as investors went off the sector.
The 27% cut in earnings and the 31% drop in distribution brought a general bucketing of the group and its management from leading analysts, although Goldman Sachs JBWere were relatively mild in their commentary (see below).
The possibility of a takeover was mentioned by Goldman, but ruled out by other brokers who pointed to GPT's $11 billion size and the difficult operating conditions in commercial property around the world as a possible barrier.
And JP Morgan hinted at a further problem buried in the accounts with some sort of financial derivative held over "one of its listed REIT (Real Estate Investment Trust) peers" that might cost "$100 million" to close out.
In its statement Standard & Poor's said the "downgrade reflects GPT's relatively high `look- through' debt levels, ongoing delays in progressing asset sales de-lever the group and continuing concerns regarding the group's liquidity profile''.
S&P said that GPT may improve its rating by selling its half interest in a joint venture with Babcock and Brown Ltd. The venture had acquired $6.8 billion in European and US property at June 30, 2007. But such as deal is problematic because no one is dealing in property around the world, such is the distrust and unease at leverage levels and debt.
In fact GPT ruled out any asset sales for the rest of 2008 saying the market was getting worse. It's just not going to happen, as GPT made clear on Monday.
''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,'' the company said in its update statement.
"The review has taken particular note of reduced demand for wholesale fund equity raisings (particularly for core real estate), and a major reduction in transaction activity globally. As a result, GPT management has decided to defer, or revise assumptions in relation to, certain initiatives previously assumed to occur in 2008, including:
"(i) the partial selldown of its 40% interest in the GPT Wholesale Office Fund ("GWOF"); (ii) the realisation of development profits;
"(iii) asset sales, including assets owned by the Joint Venture Fund; and
"(iv) the proposed launch of various funds by the European funds management platform. In addition, this review has identified likely reductions to 2008 operating income for a number of business units, excluding the Australian retail, office and industrial portfolios, which continue to perform very strongly."
That's why GPT cut its estimated 2008 operating profit to $464 million for the year to December from the estimate of $633 million a year earlier.
The company also cut its dividend forecast to 20c a share in fiscal 2008, from an earlier estimate of 28.9c.
So what did four leading brokers say in the reports yesterday to clients?
Merrill Lynch was tough, saying " Poor decision-making overshadows premium core portfolio".
"We are moving GPT to Underperform from Buy, based on its 27% '08 earnings downgrade indicating its operations are significantly worse than what it presented to the market just six weeks ago. We have lowered our Price Objective by 48% to $1.90, lowered 2008-09 EPS by 28% and 30% respectively to 21.1¢ and 21.8¢, and believe GPT will underperform A-REITs until it restores investor confidence."
"Management credibility has been tarnished; therefore GPT should trade at a discount to the sector, in our view, for the following reasons: 1.) GPT has raised $300m in equity through its DRP this year, but did not comment on guidance at its update; 2.) It was previously unclear to us how reliant GPT was on selling down a 20% interest in GWOF to meet its '08 guidance, and we continue to find its disclosure to be murky; and 3.) Virtually every new business GPT has entered recently has disappointed (BNB JV, US senior housing, European funds management).
"Outside of its premium Oz office, retail, and industrial portfolio, GPT forecasts lower contribution from every business unit. Almost 59% of the $170m earnings revision is due to GPT's inability to sell its 20% stake in GWOF ($530m book value), which would have reduced debt and allowed for further development profits.
"We are concerned of the illiquidity in the wholesale market and bid/ask spreads in direct property (GWOF was valued at 6.0%). GPT (currently BBB+/Baa1 rated) is also forecasting a potential credit ratings downgrade."
"GPT's size ($11bn EV) and offshore exposure make it a difficult M&A target in this environment, particularly given the likely buyers (SGP, LLC) face development risk and higher interest rates. We think all of the '08 downgrades have now been announced, but believe '09 guidance may further disappoint. As such, we are forecasting '09 EPU to be flat or negative for 11 of the 20 A-REITs we cover.
Goldman Sachs JBWere said:
"The downgrade highlights the risks of FM fees and development related profits in this market. To this end, it will be interesting to note whether GPT's downgrades across its business provide an insight into FY09 earnings guidance for other REITs with a reliance on fee income tied to asset values.
"Despite the positive impact on risk of the revised distribution policy, GPT is clearly in a state of strategic flux; through its acceleration of the JV unwind, eliminating development profits from distributions, and the muted (at best) near term outlook for Funds Management, the group is effectively transforming back to where it was 3-4 years ago. At current levels, GPT is therefore being priced for a significant decline in the book of its "Trust" assets as well as the JV's invested capital, and this raises questions of adequacy (both communication and execution capability) within the business."
"We continue to see significant valuation upside from current levels given the quality and scarcity of GPT's Australian asset base. Given operational uncertainties, we also take comfort from the group's revised EPS/DPS policies, and see a ~10% revised "cash" yield as relatively attractive compared to the A-REIT sector. However, offsetting this in the near term is our view on potential consolidation (i.e. that it is more likely to occur post reporting season) and the likelihood of contagion in response to further earnings/balance sheet write-downs within the sector."
And Citigroup said:
"We were expecting an ~5% earnings downgrade from GPT at their 1H results, so we were very surprised by today's ~27% downgrade for FY08 (Dec end) operating earnings. We cut EPS by 22% to 30% across our forecast horizon. Distributions will be re-based to 90-100% of operating earnings, and development profits will not be included as a part of distribution.
"The downgrade was widespread across GPT's divisions except for a slight upgrade for its Australian portfolio NOI. The main culprits were European funds managements contributing 24% of our A$151m downgrade, corporate overheads/interest forming 24% of the downgrade, the BNB JV forming 14% and the Hotel/Tourism portfolio 13%.
"The downgrade reflects management's moves from bullish earnings assumptions for the year to more bearish levels. The earnings forecasts now assume no further transactional earnings for the year. We believe GPT will now suffer ongoing negative sentiment regarding past management decisions, and asset value risk, particularly in the BNB JV. We also cut the value of the JV assets by 15% (previously -8%), and remove any development value. Given the negative sentiment surrounding the downgrade and JV value risk, we set our target price at a discount to NAV, downgrade our rating to Hold and increase our risk rating to High."
And JP Morgan said:
"(A) second attempt at 2008 guidance, further risks remain. One of the key questions is: is this an overly conservative attempt at re-setting earnings, or a sign that further downgrades are likely? We think the latter, and are now $18m below new guidance with further revisions expected once we have a chance to re-model the JV (again).
"Our interim FY09 expectations are for 21¢ EPS, -15% on prior. No further clarity on a potentially nasty derivative close-out. GPT continues to hold a derivative over what appears to be at least one its listed REIT peers - a 15% move in pricing of the underlying security would cause a $42m unrealised gain/loss… given REITs are down >40% YTD the cost of close out is potentially >$100m. That's more than enough to soak up any remaining 2H08 or FY09 development profits and one-off gains.
"Our revisions see 23% and 24% cuts in EPS and DPS in FY08 to 20.3¢ and 19.3¢ respectively followed by 15% and 20% downgrades respectively through the balance of the forecast. We reiterate that we do not see yesterday's update as a full 'clearing of the decks'.
"An S&P downgrade is a risk and breach impact of the €2bn debt facility on debt costs is not in the new guidance. On the revenue side, the only area of strength, being its core Australian assets, is not enough in our view to carry the impact of further potential deterioration in its offshore and hotel portfolios."
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