Cap rate compression has lifted GARDA Property Group +4.4% today following revaluations which take the proforma Net Tangible Assets to $1.45 per stapled security, up 21%.
The 21% increase in proforma NTA since 31 December 2020 follows the independent valuation of eight investment properties and the previously disclosed sales of three non-core properties, above book value.
The majority of the uplift centred on the revaluation of 7-19 Lake Street Cairns which increased in value from $63m in December 2020 to $86.5m in June – a whopping 41%, thanks to the adoption of a cap rate of 6.75% as compared to 8.25% in December.
The Cairns market is a very thin market with only 60,000sqm of total office space and very little transactions, making it difficult for valuers to make firm comparisons in the market. There has been a number of regional transactions in Maroochydore and Townsville that have transacted in the recent past, each in the low 6’s yields, which have re-rated the valuers view of regional offices.
The Cairns Corporate Tower (~15,000m² of NLA) is the pre-eminent building in Cairns and is currently 88% occupied with a +4 year weighted average lease expiry. It’s tenant covenants are strong with leases to the QLD state government and a range of professional services firms including Grant Thornton, BDO, GHD and a number of banks including ANZ and NAB.
Other assets at Mackay and Pinkenba have seen cap rate movements of -75 and -175 respectively. Overall, the WACR is now 5.78%, with the WACR for commercial office buildings being 5.96% and for industrial buildings being 5.56%.
Garda’s remaining six properties, now representing 32% of the Group’s portfolio, will be independently valued in the half year ending 31 December 2021.
A proforma NTA per security of $1.45 represents a 29% premium to GARDA’s closing security price of $1.125 on 10 May 2021.
GARDA currently has $17.1 million in liquidity and following the completion of three asset sales, approximately $23 million in debt facility headroom.
The Group reaffirmed FY21 distributions guidance at $0.072 per security with an expected payout ratio of between 95% and 100% of earnings.
Our Views
We questioned Garda on the Cairns valuation result and they advised that the market was thin and valuers have have generally held cap rates firm given the buildings scale in such a small regional market place.
Valuers are often slow to catch up with the market and are inherently conservative making the task of valuing regional assets incredibly difficult. The market has not moved as quickly as these cap rates imply, so this announcement brings into question the valuations policy, the quality of valuers on the Garda panel, and their preparedness (or risks to PI Cover) to maintain yield gaps to prime markets when evidence is not available.
In this case, two sales in Townsville should have provided sufficient evidence to firming values. In 2018, Cromwell acquired 420 Flinders St for $63.5m on a 7.5% yield and in April 2020 Castlerock acquired 445 Flinders Street, Townsville for $92.8 million on a 6.9% yield.
Whilst yields in regional markets tend to be higher, we not like regional assets as they are hardest to sell as sources of capital are shallow and can dry up quickly.
Garda Capital are not on our Top Picks list.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Related Articles
