By David Winning
SYDNEY–GPT reaffirmed its outlook for annual funds from operations as higher interest rates bite, while continuing to take a conservative view of near-term prospects for office property amid broad shifts in tenant behavior.
On Monday, GPT said it expects to achieve funds from operations of approximately 31.3 Australian cents (US$0.20) per security in the 12 months through December, down from 32.4 cents in 2022. The company continues to project a steady distribution of 25.0 cents per security.
“While it would appear the peak in the interest rate cycle is approaching, the rise in interest rates has increased the cost of debt and this has had a material impact on the group’s funds from operations,” GPT said.
The updated guidance was provided alongside a net loss of A$1.1 million for the six months through June, compared to a A$529.7 million profit a year ago. The result included a net valuation loss on its property portfolio of A$341.3 million, compared to an increase of A$219.5 million a year ago.
Funds from operations per security fell by 3% to 16.53 cents during the half-year period.
“The group’s balance sheet remains in good shape with gearing below 30% and approximately A$1.5 billion of available liquidity,” said Chief Executive Bob Johnston, who intends to step down in coming months. “The rise in bond yields has resulted in further softening of valuation metrics for real estate assets and a 3% decline in the valuation of the group’s property portfolio during the period.”
Like other central banks world-wide, the Reserve Bank of Australia has raised interest rates aggressively in an attempt to bring inflation under control. The official cash rate currently stands at 4.10%, having fallen as low as 0.10% during the Covid-19 pandemic.
Higher interest rates are hurting GPT in several ways. They have raised its interest costs materially, and stoked uncertainty around valuations of its property assets. They have also strained household budgets, which could lead to consumers spending less in the stores that anchor GPT’s retail-property portfolio.
Meanwhile, occupancy rates within GPT’s office portfolio continue to lag many of the company’s listed peers. Analysts say Australian office markets are challenged by increased supply and hybrid work arrangements becoming the norm, while recent property transactions risk weighing on cap rates.
GPT has been responding to these headwinds by maintaining debt at conservative levels and increasing its hedging of interest rates. The company’s gearing–a measure of its debt relative to equity–was 28.1% at the end of June, within its target range of 25-35%.
GPT said occupancy levels within its office portfolio were 88.5% at the end of June. “The office leasing environment remains challenging with hybrid and remote working impacting tenant demand,” Mr. Johnston said.
Still, its retail business has bounced back strongly from the pandemic when it offered rental waivers to some tenants. GPT said leasing activity had led to 343 lease deals being completed in the period, with positive leasing spreads, while total center sales growth lifted 11.8% in the first half compared to a year earlier.
Write to David Winning at [email protected]
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