Gpt Feels Heat Of Moody's Warning

The Age

Thursday July 10, 2008

Carolyn Cummins

ANOTHER wave of earnings downgrades has washed over the listed property market.

Despite the downgrades, the overall real estate investment trust index yesterday rose 3.1% after plunging more than 13% in the previous two trading days.

And GPT was again hard hit as ratings agency Moody's Investors Service issued a warning of potential credit downgrades following GPT's forecast cut in earnings.

Moody's yesterday placed on review for possible downgrade GPT Baa1 long-term and P-2 short-term ratings.

Clement Chong, a Moody's senior analyst, said the action followed GPT chief executive Nic Lyons on Monday forecasting operating income for this year would be 27% lower than expected. GPT has a December 31 balance date and releases its interim results on August 27.

"The review will focus on the progress GPT has made in securing additional facilities to refinance the $700 million medium-term notes due in the first quarter of next year," Mr Chong said.

"In addition, the review will assess GPT's ability to sell assets to reduce leverage, and thus increase its financial flexibility, and the likely financial metrics the company will achieve in 2008 and 2009, in light of the expected more challenging operating environment."

Despite GPT's management assuring investors that any credit downgrade would not have an impact on its bank covenants, GPT closed down 14, or 7.49%, to $1.73.

It was also speculated, but not confirmed, that GPT holds 5.3% of Dexus Property through its adviser, Merrill Lynch, in a derivative contract. In a substantial shareholder notice on December 13, a Merrill Lynch nominee bought the stake in Dexus at $1.90 to $2.02, a far cry from Dexus' closing price yesterday of $1.31.

JPMorgan's property analysts said: "GPT continues to hold a derivative over what appears to be at least one of its listed REIT peers. A 15% move in pricing of the underlying security would cause a $42 million unrealised gain/loss and, given REITs are down about 40% year to date, the cost of close-out is potentially greater than $100 million.

"That's more than enough to soak up any remaining second-half 2008 or full-year 2009 development profits and one-off gains."

Meanwhile, Commonwealth Property Office Fund said 10 of its office property assets had been revalued over the three months to June 30, resulting in a decline in value of $58,364. The book value of its property at 120 Pitt Street, Sydney, dropped 14.05%, reflecting Commonwealth Bank's lease expiry and staged exit from the building in April 2010 and April 2011.

Westpac Office Trust, whose main asset is the new Westpac head office at 275 Kent Street, Sydney, dropped the portfolio's carrying value, as at June 30, by 2.37%, compared with December.

It said the trust would now only pay distributions that did not exceed operating cash income after provision for operating capital expenditure. This meant the gross distribution would be 6.65 a unit for the year to next June 30, compared with the 7.25 paid out this year.

KEY POINTS

? Property trust faces a possible downgrade of its credit ratings.

? GPT's management says a downgrade will not have an impact on its bank covenants.