GPT, a leading property company, has reaffirmed its annual funds from operations outlook despite the impact of rising interest rates. The company continues to take a conservative stance on the near-term prospects for office property due to significant shifts in tenant behavior.
Funds From Operations Outlook
GPT expects to achieve approximately 31.3 Australian cents (US$0.20) per security in funds from operations over the 12 months ending in December. This is a slight decrease from the 32.4 cents recorded in 2022. The company remains committed to a steady distribution of 25.0 cents per security.
Impact of Rising Interest Rates
GPT acknowledges that while the peak of the interest rate cycle may be approaching, the recent increase in interest rates has raised the cost of debt and had a material impact on funds from operations.
The company reported a net loss of A$1.1 million for the six months ending in June, compared to a profit of A$529.7 million in the same period last year. This result includes a net valuation loss of A$341.3 million on the property portfolio, contrasting with a A$219.5 million increase last year. Funds from operations per security declined by 3% to 16.53 cents during this half-year period.
Strong Balance Sheet
GPT assures investors that its balance sheet remains strong, with gearing below 30% and approximately A$1.5 billion of available liquidity. Chief Executive Bob Johnston, who plans to step down in the coming months, noted that the rise in bond yields has softened valuation metrics for real estate assets, resulting in a 3% decline in the company’s property portfolio valuation.
Impact of Rising Interest Rates
Like central banks worldwide, the Reserve Bank of Australia has adopted a proactive approach to control inflation by raising interest rates. Currently standing at 4.10%, the official cash rate had fallen as low as 0.10% during the Covid-19 pandemic.
Higher Interest Rates Pose Challenges for GPT
Higher interest rates have had a significant impact on GPT, causing a range of issues for the company. Firstly, these higher rates have resulted in a notable increase in interest costs for GPT, impacting its financial position. Additionally, the uncertainty surrounding property asset valuations has been heightened as a result of these interest rate hikes.
Furthermore, the rise in interest rates has put pressure on household budgets, potentially leading to a decrease in consumer spending within the retail stores that form part of GPT’s property portfolio.
While GPT’s office portfolio continues to experience lower occupancy rates compared to its industry peers, the company is taking steps to address this challenge. Australian office markets are facing difficulties due to an increase in supply and the growing popularity of hybrid work arrangements. Additionally, recent property transactions could impact capitalization rates.
To navigate these headwinds, GPT has focused on maintaining conservative levels of debt and increasing its hedging of interest rates. As of June, the company’s gearing, which measures its debt relative to equity, was at 28.1%, within its target range of 25-35%.
GPT has acknowledged that occupancy levels within its office portfolio stood at 88.5% at the end of June. The company recognizes that the current office leasing environment is challenging, with hybrid and remote working practices impacting tenant demand.
On a positive note, GPT’s retail business has shown resilience in the aftermath of the pandemic. The company extended rental waivers to some tenants during this period, which aided in its recovery. Notably, GPT completed 343 lease deals during the period, with positive leasing spreads. Additionally, total center sales experienced a growth of 11.8% in the first half compared to the previous year.
In conclusion, while higher interest rates have presented challenges for GPT, the company has taken proactive steps to mitigate their impact. By maintaining conservative debt levels and increasing hedging of interest rates, GPT aims to navigate these undercurrents effectively. Although its office portfolio faces occupancy rate challenges, GPT’s retail business has shown promising signs of recovery.