A “golden child” defensive stock that bucked the pandemic trend

Growthpoint enjoyed record growth in fiscal 2021, booking a whopping $553 million in net profit after tax, more than doubling last year's result and lifting its NTA to $4.17 a share. On the back of large portfolio valuation gains, numerous leasing successes and major cap rate compression increased office and industrial portfolios by 67% and 33%.

The REIT’s industrial portfolio was the standout, its $200 million boost in value delivering a record year of valuation upside – up more than 15% year on year.

While the above is consistent with others in the sector, Growthpoint’s office portfolio bucked the broad trend of flat valuations, booking a more than $215 million increase, up 7.6% on fiscal 2020. The group’s operating earnings remained steady, with no material COVID-related impacts, smoothing the way for the impressive result that sits toward the upper end of its full-year FFO (funds from operation) guidance of a year earlier.

Steady improvements throughout FY21

Through all the uncertainties of working from home and the debates around “hub and spoke” versus “hub and home”, it appears that large corporates – governments included –remain attracted to high quality, affordable offices.

Through FY21, Growthpoint increased its office portfolio occupancy to 97% from 93% and signed long term leases averaging 8.2 years to high-quality tenants such as Bunnings, Monash University, the South Australian Government, and Autosports Group. The positive revaluations seen within the office portfolio as a result of these leases demonstrate the ongoing demand for long WALE (weighted average lease expiry) assets from quality tenants – particularly in the current low interest rate environment.

A diamond in the rough

The golden child of the property sector since early 2020, industrial real estate cashed in on sweeping lockdowns, which shifted retail spending online and exponentially boosted warehouse demand from retailers and logistic providers alike.

Gross take-up of warehouse space in Australia in 2021 has so far already exceeded the previous 1-year average annual figure. And with the number of consumers opting to purchase online continuing to rise, this demand is expected to remain elevated. These structural shifts in consumerism have driven demand for this asset class, with significant amounts of capital looking to acquire these assets. Growthpoint’s industrial portfolio cap rate of 5.2% is higher than that of other listed AREITs, which average around 4.7%, suggesting there may be further positive revaluations to come.

Outlook

The improvements in occupancy and WALE achieved over the course of FY21 place Growthpoint in a strong position. And with its balance sheet gearing at historical lows, the group is poised to grow.

Management has guided towards four strategic pillars it will focus on into FY22, including acquisitions of high-quality properties and entering the funds management space. Although the group has 13% of income at risk in FY22 in the form of lease expiries, many are in advanced renewal discussions and we expect positive outcomes here.

We remain attracted to Growthpoint for its high-quality office and industrial portfolio, with resilient cash flows backed by high-quality tenants, and have a degree of confidence in management’s ability to deliver on the guided FFO, despite the ongoing uncertainties surrounding the current COVID crisis.