Reply to thread

I suspect you will find that the P/E you are stating includes revaluation gains (non cash in nature) in the denominator as earnings. REITs (like GPT) have to revalue their asset base every so often and any gain is passed through the profit and loss statement and hence pops up in REIT earnings. The gain is unrealised and is only actually captured by investors if the underlying asset is sold. Kind of like buying your house for $100 and saying it is worth $120 based on an independent valuation a few years later, and declaring a $20 profit that year to recognise the gain. There is nothing wrong with this per se but important to note that this is not like on like with earnings of general corporates which don't include reval gains (eg Woolworths earnings do not include reval gains).

This therefore understates the P/E and why REITS tend to report "operating earnings" which strip out the reval gains and more closely align with the cash flow being generated by the underlying assets. On this basis, GPT's P/E is closer to 14-15x from memory, perhaps even higher.

In terms of what institutional investors are worried about, well the biggest concern is really how GPT manages to hit its long term earnings growth target of CPI + 2-3%. This implies ~5-6% earnings growth. The nature of the underlying assets provide longer term fixed rental growth of 3-4% which means there is a gap to bridge to get them to their 5-6% target. Management have been achieving this in recent history by buying their shares back accretively (which is getting harder given their P/E is much higher); cutting overheads (again limited in scope); cancelling out of the money hedges (which delivers an IRR of ~3.5% but boosts accounting earnings significantly). Now that this easy fruit has been taken, the question is how they will drive higher than CPI growth going forward. Also in an environment where retail tenants are flexing their muscles and demanding lower rents with GPT's portfolio exposed ~50% to retail from memory.