This article is from the Australian Property Journal archive
ANALYSTS have openly welcomed GPT’s new CEO, but they have cut short any honeymoon – delivering a 17 items ‘to-do’ list which mostly asks GPT to come clean.
Meanwhile the market continues to respond negatively to the appointment, GPT shares fell another 14% yesterday, down 7 cents to 43 cents – after falling 8.5 cents or 14.41% to 50.5 cents a day earlier.
JPMorgan said Michael Cameron’s looks well placed to take on the challenge that is GPT and has provided a list of 17 agenda items which it said the new board of GPT and Cameron should address.
Aside from the $2.5 billion asset sales, JPMorgan said the top priority is for GPT to clarify its earnings generation of the joint venture for 2009.
“In October 2008 GPT’s directors claimed “too hard” on predicting JV earnings guidance at the same time as providing precise 2009 guidance for the rest of the business (including its hotel portfolio).
“We’re four months into the ‘09 year and it’s past time to give the market at least a range of outcomes. Starting point is zero in our minds (and in our model) with a prospect of a negative earnings impact as trading losses are taken in the JV a concern … if the earnings outlook is any better than this, let the market know!”
JP Morgan also wants GPT to come clean about its JV relationship with Babcock and Brown, given that the investment bank has collapsed. It said with Babcock & Brown out of the picture and GPT having all of the remaining equity and fund and asset control, GPT needs to clarify why it will still be in a position to account for only a portion of the structure’s debt.
“Our view is that the market is yet to fully believe GPT’s assurances that (but for one minor provision in one of the US loans) the $5.0 billion of lending in its Babcock & Brown JV has no recourse to GPT – as such the JV has a negative value in GPT’s trading EV.
“And will the transition to Halverton of a greater pool of assets to manage help stop the bleeding from GPT’s European funds management platform? A near-term fix is required for the $42 million pre-tax loss as a contribution to group EBIT from what has proven to be a disastrous investment.
JPMorgan also recommended GPT scrap the Halverton business and the Hamburg Trust and offload the assets. The Halverton business appears to have LVR breaches in managed funds – two of the five that are external to the JV are geared at 79% and 81% and average gearing is 64%.
JPMorgan also called for GPT improve disclosure for the GPT Wholesale Shopping Centre Fund and GPT Wholesale Office fund. It noted the dismal disclosure last week regarding GPT’s further sell-down was the latest in the ‘low’-lights of market announcements regarding this investment.
“GPT security holders are still by far the biggest investors in the wholesale funds with $1.5 billion at stake even post the latest sell-down and yet are denied basic data on the underlying real estate investments, let alone the lending arrangements and a look at the balance sheets.
“Current practice hides away some of the best real estate GPT owns/manages… why?”
JPMorgan also wants to GPT to clarify the capital call on Highpoint. Earlier this month, GPT was given a ‘put option intention notice’ on Highpoint Shopping Centre and the adjacent Maribyrnong centre from the Highpoint Property Group (members of the Besen family) to buy a further 16.7% in the property.
GPT last independently assessed the 50% stake in Highpoint that it manages at the December 08 half at $600 million. If GWSCF does not take up the option and GPT agrees it must come up with the $140 million-$190 million.
“It’s not yet clear whether GPT will be forced to write a cheque here, but will go through this same process on Highpoint this time next year (and every year to 2016) on the remaining four pieces of the put,”
On the final topic of disclosure, JPMorgan said GPT’s pricing could benefit from a return to the high quality asset level detail that signified Lend Lease’s approach prior to the internalisation.
“We miss the 6 monthly NOI actuals and we’re not alone. GPT has, without good reason in our view, over the last 3 years moved away from providing asset level income disclosure. Why not provide it? One could have argued in the bull market that it promoted a potential take-over premium – that argument is dead,”
JP Morgan also recommended GPT review its non-core asset sale program which is estimated to be worth $2.5 billion. It believes that rather than put B Grade assets on the market in this cycle, GPT should continue to manage these assets until the market improves.
Instead, JPMorgan said GPT needs to sell real estate that the market actually wants.
“It could start with positions in iconic assets where it does not exercise control, such as 1 Farrer Place, Westfield Penrith, MLC Centre, or Australia Square. Failing that, a sale of one of its 100% owned assets such as Melbourne Central would resolve many of GPT’s ills. Getting one of these ‘core’ assets away could well resolve the liquidity concerns more effectively, faster, and at a shallower discount that grinding through the non-core process,”
Finally, it what could prove unpopular with unitholders, JPMorgan has recommended GPT scrap the dividend and replace the cash dividend with scrip or as a worst case switch on the DRP under-write.
“We now forecast earnings of $323 million for 2009 and $304 million for 2010 and see a reasonable case for GPT to hold onto all of those earnings via DRP underwriting, as painful as that process is likely to be for security holders.
“This is a viable tap to be turned off, to sit alongside the asset sale process GPT is trying to work through which in itself is targeted at improving GPT’s liquidity position and leverage position,” JPMorgan said.
Australian Property Journal
