The sorry tale of GPT

Live news.com.au says that GPT has confirmed it’s looking to raise between $1.6 billion and $1.9 billion to recapitalise its business, and says it will now be concentrating on Australia.

Its a lesson that has taken three years to learn, and cost security holders billions of dollars in lost value, lower earnings and distributions. There’s no fluky Australian dollar to worry about (and cost it heavy losses).

Its all so simple, but no apology in the main document yesterday for the losses and the misadventure with Babcock & Brown.

Nor was there any mention in the main document of the departure of CEO Nic Lyons and the decision by chairman, Peter Joseph not to stand again next year.

That was announced in a presentation to the market and big investors.

It has had to resort to finding the Singapore Government controlled GIC Real Estate, part of the GIC, one of the country’s two official wealth funds, to try and support it.

That means selling off control of some of the best office, tourism [including Voyages Hotels and Resorts] and retailing mall assets in the country and GIC might end up with 12% to 18%…..it doesn’t sound a lot, but it will have a board member and be by far the largest shareholder.

And to pull back the company from the brink of collapse, GPT has also negotiated with its European banks to increase its so-called “look through” gearing covenant from 50% to 55%, which will give it more leeway in handling the added and unwanted pressures from the lower Australian dollar (falling in the main because of the rise in the value of the US).

GPT said this will give it “considerable headroom to debt covenants in the event of deterioration in asset values or further depreciation of the Australian dollar”.

GPT also confirmed media reports that CEO, Nic Lyons is departing immediately while chairman Peter Joseph will not be standing for re-election at the annual general meeting in May of next year.

Securities in GPT have fallen by more than 70% this year with the company’s debt blowing out and GPT losing hundreds of millions of dollars via its disastrous international joint venture with Babcock & Brown: a toxic adventure in itself.

GPT has tried and failed to sell many of its property tourism assets, worth as much as $2.5 billion.  In the current economic climate it has proved difficult to move the assets. Some commentators say the company overpriced these assets and couldn’t sell them.

Under the restructure, announced yesterday afternoon, GPT said it expects to raise a total of $1.6 billion to $1.9 billion through a mix of rights offers and placements.

“Net proceeds from the offer will be used to repay debt and significantly de-leverage GPT’s balance sheet, with GPT’s business plan and debt maturities fully funded through January 2010,” according to yesterday’s statement.

If the raising is successful, GPT expects its gearing to fall to 28.8% from 37.3%.

Its total “look through” gearing will fall to 41.5%, from 46.7% (but the European one will rise).

After the raising, GPT said it will have sufficient liquidity to fund all capital expenditure requirements and debt maturities into 2010.

“GPT expects leverage to further reduce over time as the group exits non-core investments,” the company said.

The entitlement offer comprises the institutional offer, expected to raise $1 billion and the retail entitlement offer, expected to raise $300 million.

The indicative price range is 60c to 75c per security, equating to a discount of 35% to 48% from GPT’s security closing price of $1.15 on October 21. They were $3.80 last May!

The trading halt is expected to be lifted on Monday.

GPT will also complete a placement of perpetual exchangeable securities to GIC Real Estate to raise a further $250 million and GIC Real Estate will also sub-underwrite the majority of the retail entitlement offer.

Following the offer, it is expected that GIC Real Estate will have a holding in GPT of between 12% and 18% on a fully diluted basis. GPT will also invite a representative of GIC Real Estate to join the board if its ownership is greater than 10% on completion of the raising.

The company said it would “prudently” exit overseas assets and return to its core focus of being a “high quality, diversified Australian focused A-REIT”.

GPT is in discussions with the manager of its aged-care business in the US to sell the portfolio. Its European funds management business is currently loss making.

The company explained why the situation had developed where it needed this money, quickly:

“GPT has been pursuing a strategy of non-core asset sales to reduce leverage. However, the continued deterioration of capital markets has adversely affected GPT’s ability to sell assets at acceptable prices.

“In addition, the recent sharp and unforeseen depreciation of the Australian dollar against the Euro (16% since 30 June 2008) and the US dollar (27% since 30 June 2008) has significantly increased both balance sheet and look-through gearing levels and reduced the amount of headroom available under debt covenants.

“This has occurred in the absence of any movements in property values.

“Following the capital raising GPT will have sufficient liquidity to fund all capital expenditure requirements and debt maturities into 2010. GPT expects leverage to further reduce over time as the Group exits non-core investments.

“Having considered the alternatives available to improve its balance sheet position, the Board has concluded that the pro rata equity raising (supported by a cornerstone investment from GIC Real Estate) will provide the best long term value for GPT investors.

“GPT will continue to pursue non- core asset sales where appropriate in light of market conditions, but will now have considerably more flexibility in terms of the timing of these asset sales.

“GPT has received the required approvals from the European Syndicated Facility banking syndicate to increase the look through gearing covenant threshold for the Group’s €2 billion syndicated facility, from 50% to 55%. This approval is conditional on completion of the capital raising announced today. GPT expects that the capital raising will be viewed favourably by ratings agencies.

“GPT remains committed to a business model focused on the ownership, management and development of a portfolio of high quality Australian real estate. GPT’s core domestic portfolio represents 73% of the Group’s existing asset base. This portfolio continues to exhibit strong earnings and defensive investment characteristics in an unstable market.

“As previously announced, GPT maintains its commitment to exit its non core bulky goods retail, Hotel/Tourism, US Seniors and Joint Venture investments over time.

“GPT has no intention to commit further investment capital offshore. GPT’s Board and management believe that the recapitalisation will enable investors to again focus on the strengths of GPT’s high quality diversified portfolio of Australian real estate.

“GPT has revised its distribution policy to better reflect the ongoing focus on its core Australian portfolio. From 1 January 2009, GPT will pay a distribution equivalent to 90-100% of underlying realised earnings before any development profits realised in the period and any income received from the Babcock & Brown Joint Venture, after any distribution paid on the perpetual exchangeable securities, subject to the ongoing requirement of the Trust to distribute its taxable income.

“The DRP is suspended immediately and is not expected to be utilised for the financial year ending 31 December 2009.”

A Report by The Mole