GARDA Property Group: Activated

About the author:

Author name:

By Fiona Buchanan

Job title:

Co-Head of Research, Senior Analyst

Date posted:

05 August 2022, 8:00 AM

Sectors Covered:

Property, AREITS

• GARDA Property Group (ASX:GDF) result highlighted the leasing successes achieved in the active development pipeline. The focus now turns to North Lakes post Development Approval.
• FY23 guidance has been provided comprising FFO of $13.7-14.3m and DPS of 7.2c which is line with FY22 and our expectations.
• While the existing development pipeline can be funded via current facilities, GDF has flagged it’s aiming to divest two assets in Melbourne (Botanicca 7 and 9).
• We retain an Add rating with a (login to view) price target.

Event

FY22 result - FFO of $16.7m/8c and DPS 7.2c (vs $16.2m/7.8c and 7.2c in the pcp). NTA stands at $2.05 (vs $1.45 at June 2021).

FY23 guidance - FFO range expected to be $13.7-14.3m and DPS of 7.2c which equates to a distribution yield of 4.7% paid quarterly. Payout ratio between 105- 110% while the development pipeline completes (upon completion the fully leased projects will deliver an additional $5.2m in property income).

We expect the swing factor will be dependent on interest costs.

Analysis

Portfolio - as at June the portfolio was valued at $650.7m across 17 properties which includes current development projects (total increase 31.1% vs the pcp). Including development projects independently valued on an ‘as if complete’ basis the portfolio value increases to $755m.

The weighted average lease expiry is 5.7 years; occupancy 90.7%; and weighted average cap rate 5.05% (industrial 4.50%/office 5.54%). Fixed annual increases average 3.6%.

Asset sales - While the existing development pipeline can be funded via current facilities (FY23 capex spend ~$70m), GDF has flagged it plans to divest two office asset in Melbourne: Botanicca 7 (BV $63.5m; 100% occupied; 5% cap rate; 4.3 year WALE) and Botanicca 9 (BV $68.5m; 66% occupied; 5% cap rate; 5.6 year WALE).

Proceeds from asset sales will be used to further bolster the balance sheet.

Leasing - 2% of the existing portfolio is up for renewal in FY23 (largely relates to 3 expiries in Cairns). Key vacancies are Hawthorn East and Botanicca 9.

Development - Near term we expect development focus will turn to the North Lakes industrial site which received Development Approval during 2H22. Construction is expected to commence in 1HCY23.

Capital management - During the 2H, GDF finalised its debt facility extension with its $280m facility (ANZ/St George) extended for a further 3 years (expires March 2026).

Post recent revaluations the facility has been extended by a further $40m to $320m and as at June was drawn to $260m (31%/$100m hedged). All fees and margins were in line with the original facility. Gearing is around 36% currently.

Forecast and valuation update

We make changes to our forecasts which largely relate to higher interest costs. FY23 DPS of 7.2c is unchanged as we were in line with guidance and assumes a payout ratio of 107%.

We expect the payout ratio will be below 100% from FY24 as the income from the current development pipeline starts to contribute. We have not included any asset sales in our forecasts.

Post result, our NAV valuation moves to (login to view).

Investment view

GDF provides exposure to the industrial and office sectors which over the near term will re-weight further to industrial as the current pipeline builds out as well as incorporating planned office divestments.

We expect there is near and medium-term upside risk to current earnings and NTA based on the “build to own strategy” and broader tailwinds for industrial assets despite the near-term interest rate uncertainty.

Price catalysts

Successful pre-commitment leasing outcomes on new projects (particularly North Lakes); M&A; leasing successes on the existing portfolio; and asset re-ratings.

Risks

Tenant default/non-renewal.

Find out more

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