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Great Portland outperforms other Reits on gearing

The central London office developer has had a rocky few years. The future might be brighter
May 24, 2023
  • Discount to NAV
  • But no dividend growth

To be a shareholder in Great Portland Estates (GPE), you need patience. The central London office developer has swung to a hefty pre-tax loss in three of the past seven years thanks to drops in valuation. As a result, the shares’ net asset value (NAV) is 10.5 per cent lower than it was in 2016. Meanwhile, dividends have remained flat since 2020 and the company has given no indication that it will increase them any time soon.

Still, that was the past, and an argument could be made that GPE’s current discount to NAV represents a decent entry point for a business primed for future growth. Like its peers, interest rates caused its valuation to drop and resulted in a pre-tax loss in its results for the year to 31 March, but GPE's operating profit before those value changes are factored in increased by 35.6 per cent. What's more, its occupancy rate is up to 97.5 per cent – much improved on the 89.2 per cent it recorded this time last year.

The margin on that operating profit before value change is tight, though. At 21.7 per cent, it is better than last year’s figure of 17.3 per cent, but it still gives it one of the lowest operating margins among the listed real estate investment trusts (Reits).

Where GPE outperforms the other Reits is its low gearing, which is encouraging in a period of high interest rates. GPE says it is on the hunt for new assets, pointing out that it bought the bulk of its current portfolio post-Lehman collapse. It’s arguably a clever countercyclical move when values are down and something its more highly geared rivals will be less able to do. But it's also a bet on central London offices, which are far from a sure thing post-Covid. Hold.

Last IC view: Hold, 530p, 17 Nov 2022

GREAT PORTLAND ESTATES (GPE)  
ORD PRICE:502pMARKET VALUE:£1,274mn
TOUCH:502-503p12-MONTH HIGH:668pLOW: 388p
DIVIDEND YIELD:2.5%TRADING PROP:NIL
DISCOUNT TO NAV:33.8%NET DEBT:26.5%
INVESTMENT PROP:£1.92bn   
Year to 31 MarNet asset value (p)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201985156.117.912.2
2020*86850.820.012.6
2021779-202-79.812.6
202283516766.112.6
2023758-164-64.812.6
% change-9---
Ex-div: 01 Jun   
Payment: 10 Jul   
*Restated