BFC3540 Stock Debates – Week 1 – GPT and GMG

We’Re GoiNg To ShOrt BecAusE ThE ProP MaRkeT is BaD … No. It’s not. You need better substance to bring to your debate because the one kid that actually trades stocks is going to destroy you.

GPT Group 

GPT Group is a property investment company, otherwise what’s known as a Real Estate Investment Trust (REIT). GPT is an active owner and manager of a diversified portfolio of Australian retail, office and logistics and business parks property assets. GPT also manages three funds, the GPT Wholesale Office Fund (GWOF), the GPT Wholesale Shopping Centre Fund (GWSCF) and the GPT Metro Office Fund (GMF).

People generally buy REITs for some exposure to capital gains (the share price increasing) and also the the dividends. So it isn’t as volatile as the other sectors.

There is an interesting relationship between REITs and companies that are purchased for their dividends. For those that have done corporate finance, they would know that there is an inverse relationship between price and yield (in the case of bonds). As we’ve seen the interest rate go lower and lower, this has prompted a higher price from these types of companies.

Below, we can see the GPT share price (green and red bars) vs. the risk-free interest rate (otherwise known as the US-10 year yield). As the interest rates goes lower and lower, the GPT share price goes higher. The recent rebound in the US-10 year yield has prompted the GPT share price to slump heavily.

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Reasons to Long 

  •  Honestly, GMG is better than GPT in every way. However, GPT has a cheaper valuation. It’s share price has not been as volatile as GMG and this could be an advantage to go long
  •  Decent growth metrics. In its FY19 full year result in August it reported a portfolio occupancy of 95.7% and like-for-like income growth of 3.5%
  • It has recently made an acquisition of 25% in Darling Park. This was purchased for $531.3m which represents 101,900 SQM of office space and 9,800 SQM of retail space – this should directly attribute to its bottom-line / revenue

Reasons to Short 

  • GMG is a better stock with better value-add property that will not be affected by property price volatility
  • US-China trade war may escalate which will erode market confidence – we have seen this happen countless times where the market is a bloodbath
  • I emphasize that the general market will influence the week-to-week movements of the share price, if the general market is down by, lets say, 0.5%, it is likely your stock will go down
  • The US-10 year continues to run up higher which will negatively affect REITs
  • Retail and office space does not provide as favorable returns as it used to

Goodman Group 

Goodman Group (GMG) is an integrated property group with operations throughout Australia, New Zealand, Asia, Europe, the United Kingdom, North America and Brazil. GMG comprised of the stapled entities Goodman Limited, Goodman Industrial Trust and Goodman Logistics (HK) Limited. GMG operates four divisions namely Property Investment, Fund Management, Property Services and Property Development. As at 30th June 2018, GMG has $38.3bn assets under management and 366 properties.

Goodman Group has been a standout performer in the REIT space. Despite its recent slump in share price it has still achieved a gain of almost 30% for the year. This is a reflection of the company’s high quality property portfolio in areas of competing demand such as e-commerce facilities and data-centers. I believe GMG is one of the best REITs in the ASX200. In the company’s FY19 full year results, it forecast to deliver FY20 operating profit growth of 10.4% on FY19. These are very strong growth figures for a REIT that generally grows at a much lower rate.

Reasons to Long 

  • Strong property portfolio that focuses on areas of high demand
  • In its FY19 report it had an occupancy rate of 98% and net property income growth of 3.3% – solid growth and reliable cash flow
  • Lots of work in progress ($4.1bn to be exact) – this has been driven by increased demand from customers
  • This development should flow organically into earnings and profit
  • From its FY19 Presentation Outlook
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Reasons to Short 

  • US-China trade war may escalate which will erode market confidence – we have seen this happen countless times where the market is a bloodbath
  • I emphasize that the general market will influence the week-to-week movements of the share price, if the general market is down by, lets say, 0.5%, it is likely your stock will go down
  • The US-10 year continues to run up higher which will negatively affect REITs
  • The ASX200 has run up pretty hard in the past 1-2 weeks, if it cools off, we will see the GMG price fall
  • GMG has outperformed all REITs, it may be overpriced

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