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Morningstar | Corporate Action: Don’t Subscribe to Growthpoint’s SPP. See Updated Analyst Note from 27 Jun 2019

No-moat-rated Growthpoint Properties Australia, or Growthpoint, has joined the growing list of AREITs raising equity to take advantage of strong security prices. The raising comprises a fully underwritten AUD 150 million institutional placement and a non-underwritten security purchase plan, or SPP, to raise up to an additional AUD 15 million. The SPP closes July 24 and the issue price is AUD 3.97 per security, a 4% discount to the adjusted last close. South African parent Growthpoint Properties is not partaking in the equity raising and you shouldn’t either. Do not subscribe to the SPP. Growthpoint securities are overvalued. Our AUD 3.30 fair value estimate is unchanged.

Fiscal 2019 funds from operations guidance is unchanged at AUD 25.0 cents per security, or cps, and management provided guidance of AUD 25.4 cps in fiscal 2020. We marginally increase our 2020 forecast to line up with guidance. Being highly priced, the equity raising pushes net tangible asset backing 1 cent higher to AUD 3.37 per security.

The equity raising will initially reduce debt then be redeployed into the development pipeline or fund acquisitions. Growthpoint is currently running the ruler over a small Sydney office building, which would cost around AUD 50 million and settle in August if the acquisition proceeds. Developments will focus on office and industrial markets, being Growthpoint’s core markets and also the best performing sub-sectors at present, given headwinds in retail.

Following the equity raising, gearing falls to 31.6% from 35% in December 2018, comfortably below the bottom end of management’s 35%-45% target range. But net debt/assets is not an accurate measure of risk as asset values are inflated. Other metrics, such as forecast fiscal 2019 net debt/EBITDA of around 5.3 times, suggest Growthpoint remains relatively highly leveraged, though not worryingly so.

Growthpoint securities are up around 15% from January 2019 lows as global bond yields collapsed after major central banks, including the Reserve Bank of Australia, turned more dovish. But our view remains that interest rates will rise over the longer term. As such, most income stocks like AREITs are overvalued.