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Morningstar | Corporate Action: Do Not Take Up Growthpoint Entitlements. FVE Unchanged at AUD 3.20

Growthpoint Properties has continued its highly acquisitive strategy, securing the fully let A-grade office tower at 100 Skyring Terrace in the Brisbane CBD fringe location of Newstead for AUD 250 million. The purchase price plus a further AUD 16 million of taxes and costs is planned to be funded by AUD 132 million of existing debt facilities and an equity raising of approximately AUD 135 million via a non-underwritten 1 for 17.65 accelerated non-renounceable rights offer at AUD 3.46 per new Growthpoint security.

We continue to value no-moat-rated Growthpoint at AUD 3.20 per security and as this is 7.5% below the right offer price, we do not recommend investors take up their entitlements.

A booklet containing information in respect of the retail rights offer will be send to eligible retail security holders on Nov. 26, with the retail rights offer scheduled to open on Nov. 27 and close on Dec. 5.

Skyring generates a 6.1% yield on the purchase price, making the acquisition around 2.2% earnings accretive, especially since half the purchase price will be sourced from debt with likely interest rate around 4%. Off the back of the acquisition, Growthpoint upgraded fiscal 2019 earnings guidance to at least AUD 24.8 cents per security, or cps, from at least AUD 24.6 cps. We believe guidance is conservative--as it has been in the past--and forecast fiscal 2019 FFO of AUD 25.1 cps. The guided fiscal 2019 distribution is unchanged at AUD 23 cps.

The assets owned by Growthpoint have been performing solidly in recent years, but the tenants, occupancy, and market rents have not a yet been tested by a period of economic contraction. We think the rental streams from Growthpoint’s assets are more susceptible to a period of economic weakness than that implied by the current share price. We use a weighted average cost of capital of 8.1% in our valuation of Growthpoint. It would appear this is a higher discount rate than that used by others, being the main reason why our unchanged AUD 3.20 fair vale estimate is below Growthpoint’s current share price and net tangible assets per security.

Growthpoint’s gearing on a pro forma basis will rise to between 37.6% and 38.8%, depending on the participation in the rights offer. This puts Growthpoint’s gearing materially above most Australian REITs. We’d prefer more conservative leverage settings even though Growthpoint has almost only 1% of leases expiring in fiscal 2019. Lease expiries step up thereafter, with 11%, 6% and 21% of leases expiring in fiscal 2020, 2021 and 2022, respectively.