GWOF

GPT Wholesale Office Fund (GWOF) are in the market with a 10yr green bond. Indicative pricing is 3.25% yield, which is relatively cheap compared to the A- to A+ REIT curve. Fair value would sit at 2.85% yield.

The bond will be issued in line with GPT Group’s Sustainable Debt Framework and will contain eligible green buildings which meet the CBI low carbon buildings criteria. The bonds will be certified by CBI and verified by EY. The total eligible asset pool for CBI compliant bonds are assets worth AUD6.4bn.

In our view, this is a high-quality portfolio, with 98% Prime CBD office assets in the three deepest markets in Australia. The portfolio fundamentals are exceptional with high occupancy, weighted average lease expiry (WALE) of 5.8 years, and stable income streams. The tenant base is also well diversified across many of the Australian blue chips.

GPT are leaders in sustainability and 100% of GWOF operational buildings are certified carbon neutral. GWOF benefits from the strong management team across GPT Group, which helps execution on the development pipeline and ongoing running of its office assets. The credit is also lowly geared (16.5%) and comfortable within the credit parameters required for an A- rating by S&P.

While GWOF is a pure-play office REIT and there are some downsides from work from home (WFH) dynamics that may play out, investors should see this as a good reopening trade that will perform well.

After two years of WFH remotely, there will be many workers returning to the office to the way things were prior to COVID-19. GWOF’s tenant base is well diversified, which also helps mitigate any risk from those who may prefer WFH arrangements.

GWOF is managed by GPT Funds Management Limited (a member of GPT Group). GPT Group (A/A2, S&P/Moody’s) is ASX-listed and required to hold a minimum 15% and maximum 49.9% ownership interest in the Fund.

Together with GPT’s funds management platform, the GPT Group has AUD24.4bn of assets under management as at 31 December 2020. GWOF also has a liquidity review every ten years, with the next review not due until 2026.

Portfolio characteristics are solid, with occupancy of 89.9%, a weighted average capitalisation rate (WACR) of 4.82%, WALE of 5.8 years, weighted average discount rate (WADR) of 6.03%, and a development pipeline of AUD2.4bn.

Notably, GWOF has a diversified tenant base that merits highlighting. Though banking and financial customer percentage has reduced from approximately 47% to the current 33.6% over the last five years, GWOF’s income has diversified — with 208 office tenants and over 170 retail tenants, which helps reduce the overall risk of business failure and maintain financial stability should a business sector downturn take place. GWOF has consistently achieved better than market occupancy, which has driven income and asset value growth.

All data as at 30 June 2021
Source: GWOF Investor Presentation

All data as at 30 June 2021
Source: GWOF Investor Presentation

GWOF’s strong financial position provides it with capacity to fund portfolio growth and maintain its A- S&P rating. The Fund will continue to focus on appropriate capital management:

• Historically the Fund maintained a low gearing of 10-20% to preserve capacity for acquisitions
• Since there are higher returns in ‘develop to own’ strategies, preserving debt capacity for acquisition opportunities is less important
• The Fund will allow gearing to move up over 2021 and 2022 towards 20-25% range as capex and developments are funded and reviewed
• The distribution payout ratio remains at 90% of funds from operations (FFO)

• A gearing covenant of 50%
• Net gearing of 16.5% at 30 June 2021
• Target net gearing of 10-30% with a preference for 20-25%
• May take gearing up to roughly 30% for a compelling acquisition with plans to subsequently reduce gearing

• Interest coverage ratio (ICR) of 10.7x as at 30 June 2021
• ICR covenant of >2.0x with GWOF operating with significant headroom since Fund inception

Source: GWOF Investor Presentation

Source: GWOF Investor Presentation

Indicative pricing is 3.25% yield, which is relatively cheap compared to the A- to A+ REIT curve. Fair value would sit at 2.85% yield.

• Around 40bps cheap of the A- to A+ REIT curve
• Basically, pricing at the BBB- to BBB+ REIT curve. Higher compensations are partly due to difficulty for office REITs in the current environment, work from home (WFH) dynamics, as well as potentially lower long-run occupancy levels

Source: Bloomberg

Source: Bloomberg

Source: GWOF Investor Presentation

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