This article is from the Australian Property Journal archive
S&P Global Ratings has downgraded its credit rating of GPT Group, saying it has limited prospects for asset recycling amid “anemic” transactional activity in the office and retail sectors, while the group is also facing an escalation in interest costs.
GPT’s rating has been downgraded from “A” to “A-“.
“The group’s execution of asset recycling and portfolio rebalancing initiatives (primarily asset sales) has proved challenging in the current real estate environment. This has been to the detriment of repairing key credit measures. Absent other capital management strategies, we believe the group’s credit metrics will remain sub-par for a “A” rating,” S&P said.
“Anemic transactional activity in the office and retail space has prevented GPT from executing sizable asset sales to pay down debt. The office sector (from where GPT derives about 33% of its current income) is seeing a paucity of transactions. Valuation expectations between buyers and sellers have varied due to uncertainty around future long-term interest rates and the implications of hybrid working on demand for office space.
“The GPT management has pivoted to capital recycling initiatives that involve sale of some non-core logistics assets. However, these sales are subject to execution risk and the sale proceeds are unlikely to restore credit metrics to levels consistent with a higher rating.”
The downgrade comes just after The Australian reported that GPT was set to offload a portfolio of Sydney and Melbourne logistics assets to real estate private equity firm Wentworth Capital for $140 million.
S&P said GPT’s credit metrics have been below expected for an “A” rating since its debt-funded acquisition of a $681 million logistics portfolio from Ascot Capital in October 2021, while it believes the funds from operations (FFO)-to-debt ratio is unlikely to exceed 12% because “challenging market conditions limit the group’s ability to recycle assets in a timely manner”.
Weakness in the credit metrics also reflects an escalation in GPT’s interest costs, S&P said, and is expecting the group’s cost of debt to rise from 4.1% as of June 30 to above 5% over the next 12 months.
“This is because of higher base interest rates and credit spreads that have been widening for the real estate sector. GPT’s weighted average debt maturity of 6.1 years and hedging profile provide some offset to these risks.
“A meaningful increase in interest costs has been a drag on GPT’s credit metrics, despite the group’s progress in applying asset sales to lower debt.”
“We expect GPT’s financial risk profile to be more consistent with a ‘A-‘ rating over the next two years. The FFO-to-debt ratio was below 12% in fiscal 2022 (ended December 2022) and we expect it to remain at that level in fiscal 2023 and beyond. This is despite the improvement in debt-to-EBITDA that was driven by growth in rental income from the group’s retail and logistics assets. In our base case, we expect the debt-to-EBITDA ratio to gradually improve to 6.0x-6.5x over the next two years, down from 6.9x in fiscal 2022.”
GPT’s net gearing (ratio of net debt to total tangible assets) was 28.1% and look-through gearing was 30.3% as of June 30, 2023. GPT targets a net gearing range of 25% to 35% with a preference to operate in the bottom half of this range.
S&P said GPT’s inability to improve its cash flow adequacy credit metrics is framed against the “backdrop of weaker transactional activity and rising discount rates in the Australian commercial real estate sector”.
GPT acknowledged the downgrade, saying it “continues to take a prudent approach to capital management”. As at the end of June GPT had net gearing of 28.1% and liquidity of $1.5 billion which funds capital commitments and debt maturities for the group through to mid-2026, it said.
“GPT’s financial policies remain unchanged with the Group remaining committed to investment-grade credit ratings in the “A” range and its long-standing stated gearing range of 25% to 35%.”
The Group’s Moody’s rating remains unchanged at A2 with a stable outlook.
