Whilst the full impacts from COVID 19 are still to be understood by GPT, the scale of disruption is starting to be unveiled with GPT confirming that 26% of its tenants (by income) are likely to be SME's.
Based on GPT's information and other assumptions detailed below, our assessment of the potential impact on the Group is that approx $43.6m of 1H2020 rental income will be waived or deferred under the National Code of Conduct provisions. This equates to a reduction of -12% for the prior corresponding period.
GPT’s CEO and Managing Director, Bob Johnston, said: “We are engaging with our tenants in a proactive and considered way so that we can all emerge from the pandemic in a position to grow our respective businesses. The application of the Code provides both landlords and tenants a clear pathway to negotiate a mutually beneficial outcome.”
GPT have advised that whilst discussions with affected tenants has commenced, it will take some time to conclude given the complexity of the application of the code and the number of tenants involved. GPT advised it is also engaging with its non-SME tenants who have sought assistance but are not governed by the Code.
Based on an analysis of the Group’s portfolio, SME tenants are estimated to account for the following proportion of portfolio net income:
• Office – 21 per cent
• Logistics – 14 per cent
• Retail – 36 per cent
The Group's Shopping Centres business, which contributes 42% of earnings has been significantly impacted with customer traffic and retail sales down sharply in March.
At the beginning of the year and prior to the impact of the COVID-19 restrictions, retail sales showed positive momentum with monthly Combined Specialty sales up 3.0 % in January and up 4.9% in February (year on year). In mid-March, the introduction of measures to contain the spread of the coronavirus, resulted in lower a fall in Combined Specialty sales of -27.3%. This was marginally offset by strong the performance by Supermarkets, which were up 19.7%. Despite this, Total Centre sales were down -21.3% in March.
For Retail assets, we've assumed 50% of specialty retailers see reductions in sales of -25% in March, -80% in April, -75% in May and -40% in June. If these impacts eventuate, then based on the 2019 earnings, the Retail division will experience a reduction of -$29.8M in rental receipts through to June 2020, equating to approx -18% over the pcp.
For Office assets, we've assumed 21% of tenants see reductions in revenues of -25% in March, -80% in April, -75% in May and -40% in June. If these impacts eventuate, then based on the 2019 earnings, the Office division will experience a reduction of -$10.6M in rental receipts through to June 2020, equating to approx -8% over the pcp.
For Logistics assets we've assumed 14% of tenants see reductions in revenues of -25% in March, -80% in April, -75% in May and -40% in June. If these impacts eventuate, then based on the 2019 earnings, the Logistics division will experience a reduction of -$3.1M in rental receipts through to June 2020, equating to approx -5% over the pcp.
Half of these reductions in income will still be "booked" by GPT with collection deferred for a later period as per the Code of Practice guidelines, though for the risk of default on repayment is high.
Not all of the SME tenant's will see revenues fall to the extent noted above, so there is some scope for improvement upon our estimates.
GPT have not however provided any guidance on the impacts that COVID19 or the Code is likely to have on the business.
In response to the current operating environment brought on by COVID-19, the Group has implemented a variety of other initiatives to reduce or defer spending on non-essential and discretionary items across the business. The Group has taken the decision to defer the commencement of both the Rouse Hill retail expansion and the Melbourne Central office and retail development until such time as market conditions are more supportive. In addition, the Group has taken the decision to withdraw employee 2020 Short Term Incentive Compensation scheme and the 2020 – 2022 Long Term Incentive scheme.
In positive news, GPT confirmed that positive leasing results were achieved during the first quarter across the Office and Logistics portfolios. In particular, Logistics portfolio occupancy has increased to 98.6% as a result of the let-up of vacancies, the completion of developments and acquisitions in the period. Two developments have been completed at Berrinba in Brisbane and are leased to DHL, JB Hi-Fi and Windoware. A facility at Yennora in Sydney has also been completed and is leased to Westcon Group. The acquisition of a fully leased 7,200sqm facility at Port Melbourne was completed for $32.4 million.
“We are pleased that we have been able to continue to demonstrate strong progress on our Logistics growth strategy following the completion of three new high quality facilities, all of which are fully leased, and the acquisition of a well located asset in Melbourne,” said Mr Johnston.
In the Funds Management division, the GPT Wholesale Office Fund (GWOF) has received binding commitments of approximately $289 million of new capital, from a combination of new and existing domestic and foreign investors, for its capital raising which closes on 18 May.
GPT also confirmed that GWOF, has increased its exposure to the growing Parramatta office market, accumulating three neighbouring sites along George Street in a transaction worth approximately $75 million. The site, which is strategically located in the heart of the Parramatta CBD and in close proximity to the proposed Sydney Metro West station, represents a medium-term development opportunity for the Fund and is expected to be able to accommodate up to 75,000sqm of prime office space.
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