GPT Seeing Improved Conditions but Avoids Guidance

29 October 2020

The GPT Group provided its operational update for the quarter ended 30 September 2020 amid improving conditions but are continuing to withhold guidance on FY20.

The Group says that they have made steady progress in finalising leasing deals consistent with the mandatory Code of Conduct and have improved rent collection rates through the quarter, though they continue to languish in the retail sector.

Office leasing has slowed as businesses re-consider their space requirements as physical occupancy remains well below pre-pandemic levels. The Groups wholesale vehicles have also seen a further drop in valuations compared to 30 June 2020 with the wholesale office fund down -0.3% and the wholesale shopping centre fund down -1.9%.

While the impacts of the coronavirus pandemic continue to evolve, GPT remains in a strong financial position, with prudent gearing, limited near term debt maturities and significant available liquidity. This has allowed the Group to continue to progress its strategic priorities while providing the flexibility to manage through the current challenging operating environment.

GPT Chief Executive Officer, Bob Johnston said: “It is pleasing to see that outside of Victoria, activity has increased and we are seeing customers return to our office buildings and shopping centres. We have made steady progress with leasing transactions and rent collection has been strong during the quarter. Our logistics portfolio continues to deliver excellent results, benefitting from sustained demand from both existing and new customers, and our strong balance sheet positions us well for the post COVID-19 recovery.”

September Quarter Operational Update

  • Rent collection rates averaged 90% of third quarter billings, up from 67% in the second quarter.
  • Office occupancy of 94.1% (94.4% at 30 June 2020) with leasing of 36,400 square metres (sqm) completed during the quarter.
  • The 32 Smith Street, Parramatta office development remains on track for completion in January 2021, with the topping out for the 28-level tower taking place in mid-September.
  • Logistics occupancy of 99.8% (99.8% at 30 June 2020) with leasing of 19,500 sqm completed during the quarter.
  • Completion of the new logistics facility at 128 Andrews Road, Penrith, with the asset fully leased for 10 years to Visy Glass.
  • In the Retail portfolio (excluding Victorian assets), Combined Specialty quarterly sales were up 0.8% while Total Centre quarterly sales were down 4.3% compared to the same period in 2019.
  • Approximately 97% of retail stores (excluding Victorian assets) are currently open and trading.
  • A further three buildings in the GPT Wholesale Office Fund (GWOF) portfolio achieved carbon neutral certification.
  • Issued A$63 million in 10-year Medium Term Notes in the Hong Kong market.

Rent Collection
Rent collection rates in GPT have improved to 90% of rental billings in the third quarter, up from 67% in the second quarter. Collection levels for the year to date in the office and logistics portfolios remain strong at 96% and 100% of billings respectively, however retail collections have only increased to 81% of billings in the third quarter, up from 36% in the second quarter. The result is particularly encouraging given conditions in Victoria remain challenging with Stage 4 COVID-19 restrictions in place during the period.

Office and Logistics
Several office leasing transactions were concluded during the quarter, with Commonwealth Bank of Australia executing a lease renewal across 16,800 sqm in Darling Park 1, Sydney and a renewal was finalised with EY across 14,900 sqm in 8 Exhibition Street, Melbourne.

The development of 32 Smith Street, Parramatta is progressing well with QBE and Coleman Greig Lawyers tenancies now handed over for fit out works. Leasing enquiry remains encouraging but conversion to actual leases remains slow as tenants continue to hold off on making decisions on requirements given the ongoing uncertainty. Construction of the office tower is expected to be completed in January 2021.

Whilst physical occupancy in our office buildings remains well below pre-pandemic levels we have seen a gradual increase in customers returning to the office during the quarter as community transmission rates have declined in Brisbane and Sydney.

Bob Johnston said: “It is pleasing to see businesses starting to return to the office environment as this is very important for the CBD economies and the many small businesses that they support. We are working closely with our customers to ensure health and safety is not compromised as occupancy levels increase.”

Tenant demand for quality logistics assets remains strong. The Group continues to grow its position in the sector with the development of a new facility at 128 Andrews Road, Penrith reaching practical completion in September. The 50,200 sqm asset is leased to Visy Glass for 10 years. The development of a 17,100 sqm facility at 42 Cox Place, Glendenning is currently underway and forecast for completion in early 2021. In Brisbane, construction of a 16,300 sqm speculative facility at Wembley Business Park is now being progressed, following the successful completion of the first two stages of the development in the first half.

Mr Johnston said: “The Group’s growth in the logistics sector reflects our extensive relationships with existing and new customers and our ability to deliver high quality assets that meet market demand. We expect demand in the logistics sector will be sustained despite generally subdued broader economic conditions.”

While shopping centres in Victoria remain impacted by restrictions, outside of Victoria trading conditions have improved with 97.4% of retail stores now open. Excluding assets located in Victoria, Combined Specialty sales for the quarter were up 0.8% on the prior corresponding period while Total Centre Sales were down 4.3%. Signs of recovery were evident with several categories showing positive momentum, with solid sales growth in General Retail, Leisure and Fashion, Discount Department Stores and Supermarkets. Foot traffic across GPT centres (excluding Victorian assets) in September was 91% of September 2019 levels.

With restrictions recently eased in Victoria, GPT are anticipating a strong rebound in foot traffic and sales across their shopping centres given the pent up demand, particularly in the lead up to the key sales periods of Black Friday and Christmas.

Mr Johnston said: “It was encouraging to see retail activity rebound in our shopping centres that had re-opened after COVID-19 restrictions were eased. The lead in to Christmas is extremely important for our retail partners and also the broader economy.”

Funds Management
The GPT Wholesale Office Fund (GWOF) received development consent to construct two towers totaling 29,000 sqm of office space at 51 Flinders Lane extending through to 32 Flinders Street, Melbourne. The Fund acquired the site in 2018, with the development designed to appeal to a wide range of businesses seeking their own floor of distinctive premium grade space. Designed by Bates Smart, the scheme will feature a medium rise North tower and a high rise South tower to be built upon a six-level podium, and approximately 900 square metres of retail. The scheme has an expected end value of approximately $500 million.

During the period the marketing campaign for the leasing of Queen & Collins commenced. The new modern workplace has been designed with flexibility and user wellbeing in mind in response to today’s evolving customer requirements arising from COVID-19, creating a strong point of difference for the asset.

All properties in GWOF and the GPT Wholesale Shopping Centre Fund (GWSCF) were independently revalued as at 30 September 2020. GWOF and GWSCF recorded valuation declines in book value compared to 30 June 2020 of -0.3% and -1.9% respectively.

A further three buildings in the GWOF portfolio received carbon neutral certification during September, being 550 Bourke Street, 181 William Street and 530 Collins Street, Melbourne. GWOF’s entire portfolio is on track to be certified carbon neutral by the end of this year, which will be a global first for a large real estate fund. The Group’s target is to achieve net zero carbon emissions across its managed portfolio by the end of 2024.

“We have set an ambitious target for the Group’s managed portfolio to be carbon neutral by 2024 and are pleased with the progress we are making. Our actions to reduce energy consumption are the most important contribution that we can make to climate change mitigation,” Mr Johnston said.

Capital Management
The Group entered 2020 with a very strong balance sheet position and has maintained a prudent approach to capital management given the ongoing uncertainty. The Group currently has $1.1 billion of available liquidity held in cash and undrawn bank facilities, which fully funds all current commitments to 2023.

GPT has modest gearing of 26.1%, an average debt term of 7.5 years and less than $5 million of debt maturing before December 2021. In September, the Group continued to extend its debt maturity profile issuing A$63 million of 10-year Medium Term Notes in the Hong Kong market. The Group maintains A / A2 credit ratings from S&P and Moody’s respectively.

Outlook and Guidance
The Group has made steady progress with leasing transactions and developments in the Office and Logistics portfolios during the third quarter. Business conditions however remain relatively subdued particularly given mobility restrictions that were recently in place in Victoria and many businesses have only partially returned to offices.