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Great Portland Estates^ (GPE, Buy at 275p) - Strong leasing supports acquisitive stance
Great Portland Estates plc
Great Portland Estates^ (GPE, Buy at 300p) - H1 consistent with improving London dynamics
Given recent increases to interest rate expectations, we reduce our NAV forecast 2%, which brings us back in line with consensus. The shares trade on a 39% discount to NAV. We remain at Buy with a 400p TP.
Very little new or exciting in the 1H25 interims from GPE, we know about the acquisitions, the developments are proceeding with the 2 AS development loss on cost set to provide the starkest evidence yet on why new build rents need to double vs 2021 levels. Development yields of 6.5% at today’s rents need rental growth to provide WACC beating returns and positively in this regard GPE maintains their outlook of prime office growth at 5-10%, explicitly broken out from the prior guidance of portfolio growth of 3-6% which in our view masked the strength in the best buildings. We are positive on GPE against other London developers, but don’t see anything to spark the shares near term. Buy PT 389p.
If only stock picking was as easy as calling the General Election! The team discuss two companies that have sought to grow their equity bases in recent weeks: GPE (£350m rights issue) and Regional REIT# (£110.5m placing, overseas placing and open offer). To listen to this week’s episode of the REcap, please click the image below. #Corporate client of Peel Hunt
Great Portland Estates plc Regional REIT Ltd.
Following GPE’s results and rights issue, we perform an analysis of what is priced in at current levels. We expect new proceeds to generate an IRR of c.17%, which assumes timely completion of The Courtyard and Soho Square at metrics provided by management, as well as deployment of capital into flex opportunities at a NIY of 6%. We expect portfolio rental value growth of 5% driven by a step change in prime rental. Assuming a cost of equity of 10%, we estimate that the current share price and c.29% discount to NTA assumes a TAR of c.7% vs. management guidance of 10%. We upgrade to Buy, expecting stronger rental growth to underpin development profits and shareholder returns.
Great Portland Estates (GPOR, Buy at 344p) - Q1 leasing consistent with improving London dynamics
The shares trade on a 33% discount to 2025E NAV or a c. 25% discount to gross asset value. This reflects a share price implied yield of c. 6.7%; we reiterate Buy and increase our target price to 400p.
We are excited about the forward look for UK Listed Real Estate, after a decade since the last cycle we can look forward to supernormal profits from developments and competitive, double digit plus total returns without yield compression. Great Portland, Landsec, BLND, Grainger, BYG and HLCL this reporting season have pointed to cash flow growth and/or development opportunities across a range of markets. Our thoughts are summarized below. UK Listed Real Estate is back: The cycle has started with GPE’s equity call. For an example of how profits could evolve we must look to 2012-2016 and some of the ‘supernormal profits’ made on London office development projects. GPE’s share price doubled 2012-2015. During this period project profits on cost up to 100% were realized. Operating leverage to values supported by growing rents is significant: A 10% increase in rent vs underwriting increases development profit on cost by 50% (20% to 30%) all else held equal. GPE mentioned potential for some yield compression, we’d rather not look to yield compression, and instead just focus on development rents. But its nice to have another driver to support values as well as rental growth. GPE and others are forecasting London prime office rents to grow 8-10% FY25. We are even more positive, with a combination of lack of supply and cost pressures (including required returns) resulting in a doubling of rents over the next several years (vs 2021 levels). At HLCL’s results the company laid out that 5% CAGR in rents more than doubles their development profits, albeit supported by the equity light / JV structures. We’ve been concerned over total returns offered by LRE: There are just too many attractive offers elsewhere across the capital structure in different sectors. But this is now changing. GPE are guiding to Total Accounting Returns of 10%, with half of that from development. Great. So if rents grow 20% we get 2x development profit on cost, so that TAR becomes 15% surely? If rents are up 30-40% then its 15-20% TAR... and we are now competitive in a higher return environment. Short term, we wonder if existing shareholders will look to raise some cash and we’ll see weakness in share prices in the sector in anticipation of further equity capital calls? We’d be surprised if we go through summer 2024 without at least BLND or LAND coming to market. Both companies at their FY24 results laid out a similar positive picture with rich opportunities, but did not pull the trigger on raising equity capital. Finally, it may put pressure on proposed new vehicles coming to market, if existing management teams can put together convincing >10% TAR packages and call existing shareholders it potentially reduces capital available for new companies and increases required returns. Ideally, we’d like to see room for both, we wish the sector to grow. We define growth by increased assets owned by UK LRE, increased market cap and increased liquidity culminating in the ability to accretively (to earnings) issue equity on a regular basis. Today is a big day for the sector, that’s been a long time coming. We expect investors who have been on the sidelines over the last several years to be taking a much closer look after today’s move by GPE.
GPE makes the most bullish call yet on the outlook for London offices and launches a front-footed rights issue to capitalise on opportunities - just like it did coming out of the GFC. We reiterate our Buy rating and 475p TP.
Great Portland Estates^ (GPOR, Hold at 423p) - FY24A sees transition as the up-cycle begins
Great Portland Estates^ (GPOR, Hold at 379p) - Trading update: leasing progress and new development starts
New week, same debate, following another suitor joining in the pursuit of abrdn Property Income Trust. Next week sees half a dozen companies reporting 2023 results. Themes to look out for include rental growth, M&A, and strategic evolution. To listen to this week’s episode of the REcap, please click the image below.
Great Portland Estates^ (GPOR, Hold at 406p) - Deals to do as London investor market warms
Our downgraded NAV assumes a stabilisation in valuations in 2H24E. The shares trade on a 32% discount with a share price implied yield of c.7%. We reiterate our Buy rating and 525p TP.
Great Portland Estates^ (GPOR, Hold at 445p) - H1: in transition as the office market resets
Initial Equity Trading Comments - 16 November 2023
GPE CBG ENT HLMA SPX TPK RS1 GSK OXIG NXR BARC SNX BRK NRR CMCX QQ/ AGR PFD EYE AO/
GPE is the latest to materially outperform expectations, and combined with an upbeat outlook, we expect to upgrade our NAV forecast by c.15%. This leaves the shares trading on a 34% discount and looking good value. Add, TP 575p/
Another outperformance in terms of NTA with GPE reporting a valuation decline of just 6.6% over the year and an NTA of 757p (our forecast 694p). Operationally the company has performed well with a record £55.5m of leasing during the year at 3.3% ahead of ERVs (ERVs were up 2.1% over the year and management is guiding to 0-5% for FY2024E with prime offices at 3-6%) bringing the vacancy rate down to 2.5% from 10.8%. The company has an ambitious strategy targeting 1m sq ft of Flex offer (currently 414,000 sq ft or c.21% of the office portfolio) together with a 1.4m sq ft development pipeline that requires capex of £0.8bn. Whilst it has a strong balance sheet (19.8% LTV), we still believe that GPE will need to be a net seller if it is to execute its plans. The shares are up 4% year to date versus the sector up 2%. At 515p they are trading on a 32% discount to NAV. Whilst this looks attractive and we recognise the company’s upbeat statement in relation to the occupational outlook, we remain cautious about valuations given the lack of activity in the investment market and retain our Hold rating.
Interims: another demonstration of robust occupier demand Like its peers, GPE is demonstrating the healthy demand for high-quality office space in London with a record letting performance and continued rental growth. The yield repricing underway is set to drag down asset values further – and EPRA NTA – but there is now a lot of downside being priced in. A strong funding position and a pipeline of future opportunity provides the REIT with optionality. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
NTA of 794p was below our forecast of 820p reflecting a 3.4% fall in values (yield expansion of just 15bps offset by ERV growth of 0.7%). Earnings were also down (as guided to by management) but below our expectation at 4.5p, largely reflecting previous asset sales (like-for-like rental income rose by 7.3%). The company has been busy making some significant disposals including 50 Finsbury Square (proforma LTV is 17.8%) and leasing space ahead of ERV (vacancy rate down to 7.4% from 10.8%) with it announcing yesterday its largest ever preletting at Aldermanbury Square to Clifford Chance. The shares are down 25% year-to-date, broadly in line with its London office peers down on average 27%, outperforming the wider real estate sector down 33%. Whilst the 32% discount to reported NAV remains wide and we recognise the continued strength of the occupational market, we expect further yield expansion to drive values down and retain our Hold rating.
GPE’s FY results are c.2% ahead of our expectations. with EPRA NTA up 7.2% y/y to 835p, led by a 6.1% increase in property values. Market office lettings were 9.8% above ERV as demand for quality space remained robust. GPE expects a decline in new supply whilst macro uncertainties remain and rents for the best office space to rise 0-6% over the next year. The increasing focus on flex space (now 13% of office space) and the potential for major pre-lettings with £32m current under negotiation are likely to result in GPE continuing to outperform the wider London market over the next year. The shares now trade at an 18% discount to NTA, tighter than closest peer Derwent London, which we think is fair value given the growth outlook.
Prelims: the future is getting brighter GPE reports a 9% total accounting return with growth weighted to 2H. Guidance of flat yields and rental growth of between 0% and 6% for London offices suggests similar returns could be achieved for FY23 and, combined with the largest near-term development pipeline, the outlook is looking increasingly bright. That said, the shares trade on a tighter discount than both Helical# and Derwent London and with GPE’s retail exposure, around 20% of the portfolio, continuing to act as a drag on results, we maintain our Hold recommendation. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
A good set of results from GPE with the NTA of 835p ahead of our forecast of 821p and showing growth of 7.2% over the year. As with Landsec/BL earlier this week, it has seen record office leasing with rents 10% ahead of the March 2021 ERVs and a recovery in retail demand. Looking forward it is upbeat about the prospects expecting office ERV growth of 0-6% over the next year (versus Derwent 0-3%) and a £1.1bn development pipeline (four projects all starting in the next 24 months). Management continues to focus on its Flex office space (currently 250,000 sq ft across 17 buildings) which is expected to grow to more than 600,000 sq ft within its existing portfolio resulting in rental and cashflow uplifts. The shares are down 7% year-to-date, broadly in line with its London office peers down on average 8% but outperforming the sector down 15%. At a 19% discount to NTA they offer good value given the improving market conditions although our preference is for Derwent at present (25% discount to NTA) and we retain our Hold rating.
Meeting Notes - Nov 29 2021
GPE AHT MAB CMCX GNS BMK CLG GBG SNG GROW CSP DSCV FUTR GNC IDEA MARS MCRO
We update our estimates to reflect the stronger than anticipated 22H1 results as the investment and occupier demand for prime offices squeezes yields lower and pushes ERVs higher; as well as reflecting the profit taken at 50 Finsbury Sq. As momentum continues to gather we expect this to be reflecte
Interims: increased rental growth guidance GPE delivered a 3.2% accounting return in 1H, driven by a 2.0% uplift in the value of the £2.5bn portfolio. Good leasing momentum means that management are upping their guidance for rental growth in 2022E to a range of +2% to +5%, which is encouraging and no doubt endorses the flight to best office space. A c.3% upgrade to our 2022E EPRA NTA per share (to c.815p) puts the shares at an 8% discount, which looks up with events. Helical# (Buy, TP 520p), on the other hand, continues to look good value in our view on a 21% discount and we expect them to endorse the positive market fundamentals next week. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
GPOR’s H1 results are c.2% above our expectations. H1 EPRA NTA rose 2.2% to 796p, led by a 2.0% LfL increase in the value of the portfolio. Development gains a strong contributor of higher than forecast EPRA NTA. Leasing metrics have improved significantly, with management upgrading its FY rental value guidance as a result (to between +2% to +5% from -2.5% to 5%). Financial risk remains low, leaving significant capacity for investment. The shares stand at a 6% discount to H1 EPRA NTA, in line with GPE’s London REIT peer group. We expect a further recovery in rental values in H2 with management’s upgraded rental guidance suggesting a TAR of c.7-8% for FY22 (H1 3.2%) which would be the highest since the 20.8% achieved in FY16.
GPOR's interim results saw EPRA NTA increase +2.2% to 796p ahead of our 776p estimate as the weight of capital targeting London offices continues to squeeze values higher. Given this backdrop and some healthy leasing performance GPOR has increased its ERV guidance to +2 to +5% for this financial ye
NAV of 796p ahead of our forecast of 777p and showing growth of 2% over the 6 months. Management is letting space well, ahead of ERVs (by 9.8%) and its confidence in the outlook is reflected by the upgrade to its rental value guidance to 2-5% for the financial year. The focus for GPE is on its development pipeline, in particular its four near term schemes (916,000 sq ft) where a start on site is expected at 2 Aldermanbury Square in early 2022. The company has today also launched its Social Impact Strategy delivering the third pillar of its Sustainability Statement of Intent and focusing on diversity, inclusion and supporting local businesses and social enterprise. The shares are up 12% year-to-date (in line with the London peer group but underperforming the wider sector +23%) and are trading on a 6% discount to reported NAV. In our view this already largely reflects the improving outlook and we retain our Hold rating.
Trading update and disposal of 160 Old St
Analyst - Miranda Cockburn +44 (0)20 7886 2778 Numerous surveys and reports have been undertaken on the impact of the pandemic on the way we work and what the future of the office looks like. The truth is that one size doesn't fit all and what suits one business model and industry won't work for another. However, this is not the only issue facing the London office REITs, they also are under increasing pressure to provide environmentally fit-for-purpose offices either via new-build or retrofit. As a result, we are unlikely to experience a straightforward recovery and therefore whilst we recognise the appeal of London offices as a safe haven for international investors, we struggle to see much growth generation near term for equity investors and believe at low discounts to NAV the London office specialist REITs look no more than fair value, Helical remaining our only Buy.
GPE DLN HLCL WKP
FY21 demonstrated the near-term shortfalls of GPOR’s portfolio positioning, with its exposure to retail, hospitality and leisure (RHL) and short-leased assets (with rising letting and capex risk ahead of repositioning) affecting both components of TAR. We share mgmt’s positive outlook for prime, su
FY21: Robust office performance muted by retail repricing As anticipated, a robust showing from GPE’s office assets has been overshadowed by a near 30% drop in the value of its retail assets, with more to come we believe. That said, the business remains in a strong position with ample liquidity and a number of potential schemes it could commit to in the near-term to deliver the space occupiers want. The shares trade at just a 4% discount to our 2022E NAV forecast, and yield 1.8%. There is better value elsewhere for investors seeking exposure to London’s recovery in our opinion. We maintain our Reduce rating and 625p target price. James.Carswell@peelhunt.com, Matthew.Saperia@peelhunt.com, Sebastian.Isola@peelhunt.com
FY21 results: Positive outlook, weaker n/t positioning
GPOR’s FY results are c.2% ahead of our expectations. FY EPRA NTA fell 10% to 779p, led by an 8.7% LfL reduction in the value of the portfolio. The resilience and growth in office rental values in H2, was ahead of our expectations and the main driver of the higher than forecast EPRA NTA. Management’s office rental value guidance for FY22 is 5% to -2.5%. Financial risk remains very low with LTV of 18.4%, leaving significant capacity for investment. Following recent positive share price performance, the shares now trade at an 8% discount to March-21 NTA, tighter than closest peer Derwent London. We expect a modest reduction in EPRA NTA over the next 12 months, principally due to further declines in retail rental values. TP 700p is a 5% discount to our ‘bottom of the cycle’ NTA.
First half results confirm a continued stable London Office market with NAV +1.8% to 868p, in line with our expectation of 865p. A +0.8% portfolio valuation increase was driven by rental value growth of 1.0% with flat yields. Developments were up 6.0% which more than offset a 0.3% reduction in the value of investment properties.
Full year NAV was just below our forecast, with a stable London Office market and progress on developments, partly offset by Retail valuation weakness. NAV +1% to 853p, was 2% below our expectation.
A prospective purchase of BT’s headquarters, could add a well-located building in the City to GPE's development pipeline. It would represents GPE’s most significant purchase since the Brexit vote and take its City exposure from 32% to 37% of the portfolio; providing an indication of where the group sees relative value.
GPE continues to experience steady end-market conditions supporting lettings ahead of market levels, disposals of dry assets, progress on new developments with attractive returns and an accretive £200m capital return. Management’s actions overall remain cautious utilising a positive backdrop to continue disposal activity and realise gains on ‘dry’ assets, with modest committed activity.
First half results confirm a stable London Office market with NAV +0.5% to 849p, in line with our expectation. A +0.6% portfolio valuation increase was just ahead of forecast with ERV growth trending ahead of management prior guidance for FY19. Nevertheless, management’s actions remain cautious utilising a positive backdrop to accelerate disposal activity and realise gains on ‘dry’ assets. This has prompted a further £200m share buyback, with management again indicating that end-markets are too expensive relative to the opportunity to buy shares in their own assets. The shares trade on a CY19E P/NAV of 0.86x vs. the UK sector 0.82x.
Great Portland continues to experience positive demand, providing early promise in FY19 forecasts. Q1 new lettings have been agreed 1.9% ahead of ERV with rent reviews 5.1% ahead. Take-up on completed developments appears good, and pre-lets on prospective schemes add to an overall resilient occupational backdrop. Sustained investment market demand similarly provides opportunity to realise gains on ‘dry’ assets, which are perceived to have limited forward returns. We continue to rate GPE’s management, assets and counter-cyclical strategy highly, but equally believe this is fairly reflected in the current valuation. The shares trade on a CY18E P/NAV of 0.85x vs. the UK sector 0.88x.
A sales desk meeting with Great Portland yesterday portrayed a continued resilient trading backdrop, providing opportunity to progress existing developments and capture outstanding growth in rents to market levels. Despite this resilience, management continues to adopt an overall cautious approach with low financial gearing. While this acts to hedge the bet taken on the direction of the cycle, it’s hard to blame them. We continue to rate GPE’s management, assets and counter-cyclical strategy highly, but equally believe this is fairly reflected in the current valuation. The shares trade on a CY18E P/NAV of 0.85x vs. the UK sector 0.88x.
GPE’s FY18 results were just ahead of our forecasts, with robust capital values and gains on development supporting NAV +6% to 845p, which was 2% ahead of our forecast. The outlook for FY19 appears unchanged, with a similar soft market backdrop, but opportunity to capture reversion and progress developments. We continue to rate GPE’s management, assets and counter-cyclical strategy highly, but equally believe this is fairly reflected in the valuation. The shares trade on a CY18E P/NAV of 0.83x vs. the UK sector 0.89x.
GPE continues to experience robust end-market conditions supporting lettings ahead of market levels, disposals of dry assets at a premium, progress on new developments and an accretive £306m capital return. While there are no new material surprises in Q3, the direction of travel is incrementally positive across the business and despite wider market uncertainty. The shares trade on a CY18E P/NAV of 0.82x vs. the UK sector 0.87x.
Lettings in 3Q16 have been struck at 17.1% above the March 2015 values and, if the larger deals are excluded the broader investment lets were 27.1% above. This underlines the extraordinary strength of the London commercial property rental market. Markets are very nervous currently and the property sector is likely to be nervous about the impact of geopolitical risks and a potential Brexit on central London occupancy. However, the economy remains very buoyant with Great Portland commenting that no tenants have raised concerns about these issues to date. We believe that the London stocks remain defensive and sheltered from the oil, commodity and currency risks. We retain our BUY recommendation.
The Facebook let at Rathbone Place by Tottenham Court Road Crossrail station has resulted in the recognition of a large tranche of development profit raising the NAV/s strongly, +14% this half year. The results focus on the valuation growth at this stage in the cycle. The group looks to the property cycle to create returns for shareholders and is now well entrenched in the execution phase of its program. The income growth during this phase is more modest as the group has been developing and refurbishing assets. The letting process is now gaining momentum into a strong London office rental market. We raise our target price to 1010p (from 944p) and retain our Buy recommendation.
Great Portland Estates has let office space amounting to 227,324 sqft of its Rathbone Place development to Facebook. The deal provides for additional lets to the group which could increase Facebook's presence in this location, close to the Tottenham Court road Crossrail station to c 350,000 sqft. The deal, at rents overall above ERV, should enable the recognition of some of the development profit in upcoming valuations. After deducting the provision for overage to Royal Mail group, this could still amount to an extra 10p on the valuation. We retain our Buy recommendation and 944p target price.
The management point to a better year than FY15E for rental growth when +10.3% was achieved. The London office market is very strong at present and Great Portland Estates is now monetising the benefits of the development pipeline and asset management program it has been working on. The lettings are delivering over 45% reversions on previous passing levels and recent lets were 13% ahead of June 2014 ERVs. We retain our Buy and 944p target price.
