Analysts and investors are expecting solid results across the board from the listed real estate investment trust sector in the upcoming earnings season. Today we take a look at GPT Group (ASX: GPT) to see if there is still some value for investors.
GPT Group is an active owner and manager of a $9.4 billion diversified portfolio of high quality Australian retail, office and logistics property assets and a Funds Management platform with $9.6 billion of property assets under management. The group owns and manages some of Australia's most iconic real estate assets, including the MLC Centre, Australia Square in Sydney, Melbourne Central, Highpoint Shopping Centre Melbourne and One One One Eagle Street in Brisbane.
GPT's share price has grown by 17% in the past 12 months. It's a very well-run company, and a quick look through its company reports will show highlights such as:
Earnings per share (EPS)
Its earning per share (EPS) are positive and have been growing since 2010.
| 2010 | 2011 | 2012 | 2013 | 2014 | |
| EPS (cents) | $.08 | $0.11 | $0.15 | $0.16 | $0.17 |
Dividends per share (DPS)
Its dividends per share (DPS) are positive and have been growing since 2010.
| 2010 | 2011 | 2012 | 2013 | 2014 | |
| DPS (cents) | $0.16 | $0.18 | $0.19 | $0.20 | $0.21 |
Debt
Its debt has remained reasonably steady since 2010.
| Amounts in millions | 2010 | 2011 | 2012 | 2013 | 2014 |
| Debt | 2,452 | 2,144 | 2,143 | 2,310 | 2,718 |
Cash flow
With the exception of 2014, its 'cash flow after investing' has been positive. The reason 2014 was negative $74.6 million, was due to unusually higher net cash outflows of $523 million for 'payments for investment properties'. These included $190.7 million for 'payments for properties under development' and $289.7 million for 'investment in equity accounted investments'.
| Amounts in millions | 2010 | 2011 | 2012 | 2013 | 2014 |
| Cash flow after investing | 163 | 860 | 715 | 568 | (74.6) |
While this is all good news for GPT, it's important to understand what is driving its share price growth.
GPT belongs to an ASX sector called, S&P/ASX 200 A-REIT (INDEXASX:XPJ).
A-REITs are Australian real estate investment trusts, that allow anyone to invest in portfolios of large-scale properties the same way they invest in other industries – through the purchase of stock. In the same way shareholders benefit by owning stocks in other corporations, the stockholders of a REIT earn a share of the income produced through real estate investment – without actually having to go out and buy or finance property.
Below is a 12-month chart of six ASX listed A-REITs.
The six A-REITs shown on the chart include GPT Group, Stockland Corporation Ltd (ASX: SGP), Shopping Centres Australasia Property Group Re Limited (ASX: SCP), Scentre Group Ltd (ASX: SCG), BWP Trust (ASX: BWP), and Abacus Property Group (ASX: ABP).
Source:Google Finance
The chart shows that, with the exception of Stockland, all companies have had significant share price increases over the past 12 months.
Why have A-REITs been performing so well.
To understand why A-REITs have performed so well over the past 12 months, we need to take a look at the Australian Government 10-year bond chart.
Source:Tradingeconomics.com
As you can see there is an inverse correlation between the share price performance of A-REITs and the Australian Government 10-year bond rate.
The current low interest rate environment leads investors to divert capital from bonds to higher yielding property, which drives asset values higher.
Higher asset values means higher share prices for A-REITs trading at a premium to the book value of their assets.
While this is great in the short-term, the question is, "What happens to A-REITs when interest rates and bond yields increase?", which of course they will.
The answer is simple.
A higher interest rate environment leads investors to divert capital away from property and back into less riskier higher yielding bonds, which drives asset values lower.
Lower asset values means A-REITs no longer trade at a premium to the book value of their assets, and their share prices fall.
Re-leasing spread
Investors should also pay closes attention to retail A-REITs like GPT where income is being eroded as tenants in the underlying properties are able to renegotiate cheaper rental agreements, placing downward pressure on returns.
Sales per square metre have been dropping gradually at many retailers over the past four years and if consumer activity remains flat, the pressure would mount on landlords to reduce rents at renewal time.
This unwelcome phenomenon is known as a negative re-leasing spread and the A-REITs with retail exposure are amongst the hardest hit.
Verdict
While I understand the investors' love of dividend yields associated with A-REITs, I'm not a fan of stocks that are so closely tied to interest rates and bond yields, and that's why I'll be sitting on the sidelines.
