Citi downgrades GPT as debt costs nip forecast
![GPT has begun work developing a new office tower at 32 Smith Street, Parramatta](http://web.archive.org./web/20180814170748im_/https://www.afr.com/content/dam/images/h/0/x/a/j/y/image.related.afrArticleLead.620x350.h13xkf.png/1534263884395.jpg)
GPT's interim result has prompted a downgrade by Citi analysts who had hoped the property fund manager would raise its full-year guidance.
Led by Bob Johnston, GPT has guided to a 3 per cent growth in earnings for its full year. Some analysts had expected the forecast might have been stronger given the decision to retain a Wollongong mall that had been earmarked for divestment.
However, any uplift from the retained mall was offset by higher debts as a higher bank bill swap rate took a toll on the unhedged component of GPT's borrowings.
Citi analysts Adrian Dark, David Lloyd and Suraj Nebhani have downgraded GPT from a buy to neutral, noting the stock had already experienced a 15 per cent rally from recent lows.
"We see fewer catalysts for a continued rerating," they wrote in a note to clients.
GPT closed 11¢ or 2.1 per cent lower at $5.17.
While higher debt costs were the key drag on the result, in Citi's view, the "tone" on retail was also more cautious than expected, according to the analysts.
GPT, which owns and manages a diversified portfolio of office towers, shopping malls and logistics facilities, booked an interim profit of $728.5 million this week.
It is also building a number of developments such as a 26,000-square-metre office tower in Parramatta where it has secured an anchor tenancy from QBE Insurance.
Funds from operations – the earnings standard used by property trusts – rose to 3.4 per cent to $289.4 million.
"Three per cent growth is pretty solid growth," Mr Johnston told The Australian Financial Review on Monday in regard to the full-year forecast.
"Some might have thought that upside from Wollongong would come through. Unfortunately we've seen interest rates negate it."
Mr Johnston attributed the recently increasing BBSW to higher priced offshore funding for banks. GPT was remaining vigilant but Mr Johnston was reluctant to identify it as a major issue for the sector.
However, Citi's analysts estimated that a 25 basis point rise in floating rates could cut earnings by 0.3 per cent across the listed property sector.
"A sustained rise in BBSW would see this impact build over time, as hedges roll off," they wrote.
"GPT's result also reinforces our preference for office/industrial exposure over retail, with further evidence that retail headwinds are weighing even for highly productive portfolios."
CLSA analysts Sholto Maconochie and Stephen Lam have retained their underperform rating on the stock after it delivered what they called a "mixed" result and had "disappointingly" left the earnings growth guidance at 3 per cent.
The CLSA analysts expect that growth could rise to 4 per cent over the 2019 financial year "but upside appears to be priced in", they wrote.