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Morningstar | GPT Sells Half of MLC Tower at 3% Premium to Book; FVE Unchanged at AUD 5.40

GPT’s disposal of its 50% stake in the MLC office tower for AUD 800 million, a 3% premium to book value, is a good outcome. Our fair value estimate for narrow-moat-rated GPT remains at AUD 5.40, with the stock screening as overvalued currently trading around AUD 6.20.

The main benefit for GPT is the ability to redeploy the capital released from a low-yielding and sharply priced prime Sydney CBD office asset into other assets with superior long-term growth prospects. Initially capital will be used to reduce gearing, thereafter it will be redeployed to the industrial development pipeline. Management previously flagged GPT is on the cusp of investing in completed industrial facilities in West Melbourne or industrial land. If GPT can fully redeploy the AUD 800 million in the near-term, it could be around 2.3% accretive to our fiscal 2020 forecasts, presuming the new industrial assets have an average yield of 6%. However, there is no free lunch as investing in the mooted industrial sites are riskier than prime Sydney CBD offices and hence will slightly increase GPT’s weighted average cost of capital.

We think GPT achieved a full price for the stake, struck on a cash yield of approximately 4.2% or an implied capitalisation, or cap, rate of 4.71% (GPT’s December valuation had the asset on a 4.86% cap rate). The cash yield is below the valuer-determined cap rate, as the valuers undoubtedly assume many of the rents will step up materially when existing leases are renewed. With the cash yield of 4.2% broadly equivalent to GPT’s average cost of debt, the sale will have negligible impact on 2019 guidance for 4% growth in funds from operations, or FFO. We estimate GPT’s gearing will initially decline by 410 basis points to approximately 22.2%, but will gradually increase as the capital is reinvested.