London office developer Great Portland Estates (GPE) has launched a fully underwritten 3 for 5 Rights Issue to raise £350m (£336m net of expenses) through the issue of 152 million new shares at a price of 230 pence.
The issue price represents a 44.5% discount to the closing price of 414.6 pence on 22 May 2024 (adjusted for the recommended final dividend for the year ended 31 March 2024) and a 33.4% discount to the theoretical ex-rights price based on that closing price.
The company said the Rights Issue would allow it to take advantage of “attractive new acquisition and development opportunities emerging in central London” and deliver attractive and accretive shareholder returns.
The company added:
“Higher interest rates have disrupted the commercial property investment market, creating significant near-to medium-term acquisition opportunities in central London with values approaching their trough and assets trading broadly in line with 2009 real capital value levels.
“Operational market dynamics remain strong for GPE, across both its HQ and differentiated Flex offering, with leasing 9.1% ahead of ERV and the Group’s vacancy rate very low at 1.3%.
“With prime office demand remaining robust, and current levels of vacancy remaining low, the Group expects market conditions to remain favourable and, looking forward, anticipates new office supply within London to tighten further alongside a growing sustainability-led bifurcation, underpinning future rental growth.
“GPE is well placed to take advantage of the market opportunity given its strong track record of disciplined capital management and accretive acquisitions, combined with its specialist development and refurbishment expertise, in-demand Flex offering and continued sustainability and customer focus.”
The Rights Issue will increase GPE’s available investment capacity to £450m and is expected to result in a loan to value ratio of 18.2% post receipt of the net proceeds.
Acquisition and development opportunities
GPE has a near-term acquisition pipeline of £1.4bn within central London, split into a ‘Tier A’ and ‘Tier B’ list based on the group’s assessment of the probability of a potential purchase. Beyond this it has an additional watchlist of £1.4bn of assets.
From the higher probability Tier A acquisition targets, the group has recently exchanged on The Courtyard and has a further two near-term potential off-market Flex acquisitions under review which are adjacent to or opposite existing properties of the group.
Given an increasing shortage of high quality office space, potential returns from the group’s existing development pipeline are also becoming increasingly attractive, it said.
GPE intends to use £168m of the proceeds from the Rights Issue to commit to capex (for the Soho Square Estate and The Courtyard). This will take total capex on committed GPE schemes from £498m to £666m.
GPE will seek to deploy the remainder of the proceeds in new acquisitions over the next 12-18 months, subject to market conditions.
The group also has around £660m worth of assets earmarked for sale over the near-to-medium term as business plans complete. However, the company expects to time the sale of these assets opportunistically when investment market conditions are more favourable.
Value and income growth
The board said that it expects the acquisitions and developments to enhance shareholder returns and be accretive to both EPRA earnings and NTA per share over time.
GPE is targeting to deliver a total accounting return of 10% plus over the near-to medium-term (before yield compression), with additional upside available should property yields contract in a falling interest rate and improving rental growth environment.
GPE has updated its target rental value growth range for the financial year to 31 March 2025 to between 3.0% and 6.0% across the portfolio with prime offices expected to continue to outperform with a target rental value growth range of between 5.0% and 10.0%.
GPE remains committed to maintaining its LTV within the range of 10 to 35%.
GPE expects an inflection in EPRA earnings over the next 12 months given extensive onsite development and refurbishment activity, and the subsequent uplift from increased rental income. The board intends that the total dividend payout for the year to 31 March 2025 will be at least equal to the total payout for the year to 31 March 2024 and may be increased depending on the timing of, and returns generated from, the deployment of the proceeds of the Rights Issue, as well as future asset disposals.
Toby Courtauld, chief executive of GPE said:
“The fully underwritten Rights Issue will allow GPE to seize the significant opportunity we see emerging in the central London commercial real estate space. We have seen a correction in asset values over the last 18 months with central London commercial real estate now trading in line with levels last seen in 2009 in real terms. We are currently tracking approximately £1.4 billion of acquisition opportunities which we believe are capable of being purchased at or below replacement cost, with GPE well placed to take advantage of these opportunities given our best in class offering, sustainability credentials and differentiated flex offering. Beyond this, there is a further £1.4 billion of opportunities on our watchlist. GPE have a strong track record and a disciplined approach to allocating capital, ensuring we operate in tune with London’s cyclical property markets with the objective of delivering attractive stakeholder returns.“