Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 380

A-REITs offering much-needed income

While Australian listed property stocks, or A-REITs, have gone through a challenging period during 2020, most are currently performing well and offer investors an attractive opportunity for income yield.

During the latest reporting season, most A-REITs did not provide much future guidance which is unusual, but this was more a result of the challenge in predicting the short-term future rather than any specific concerns about the property groups.

Indeed, A-REITs outperformed the broader Australian equity market during reporting season, returning 8% (compared to 3%) in August 2020 and this outperformance continued through September.

Income trajectory

On the whole, balance sheets across the sector are in good shape and within covenants, with increased available liquidity. As investors, our focus is now more on the income trajectory.

One of the key concerns about A-REITs during the lockdown was the impact it would have on rent collections and income. Across the sector, rent collections have varied. The most impacted were large scale and CBD-based retail A-REITs while sectors such as office, industrial and other subsectors were less affected.

Now, with the COVID-19 lockdowns relaxing across Australia, with the exception of Victoria, stores are opening, and foot traffic is returning, and this is leading to an acceleration in rent collection.

Encouragingly, despite the drop in rent collection, income yield across many A-REITs has remained strong and, as the situation improves, we see the potential for good upside in income yields. In fact, in some cases, distributions are back to the same levels they were before the COVID-19 outbreak.

Taking the diversified GPT Group (ASX:GPT) as a bellwether for A-REITs, over the six months to June 2020, it experienced around 80% rent collection, yet the most recent distribution rate annualised still provides a yield of around 5% on current pricing.

Another example is Aventus Group (ASX:AVN), Australia’s largest owner and manager of large-format retail offerings across Australia. Aventus is arguably a barometer of what may transpire for other REITs, and why we are constructive on the sector as a source of income.

At the end of January 2020, Aventus had a share price of $2.99. Its most recent quarterly distribution at the time was 4.26 cents per share which annualised would have reflected 5.7% distribution yield.

Unfortunately, with the uncertainty of COVID, the distribution was cut to 1.06 cents per unit for the March quarter, while its security price hit a low of $1.36. By June, the quarterly distribution was increased to 2.35 cents. When Aventus reported its results in late August, foot traffic (excluding Victoria) was actually above the prior year levels.

Source: Aventus

Its most recent September quarterly distribution was increased to 4 cents, similar to pre-COVID levels, and the security price at the end of September was $2.36. The annualised rate therefore reflects a yield of 6.8%, or more than 100 bp higher than that in January.

In the meantime, long-term interest rates have also come down, making the case for alternative sources of income even more compelling. This provides the backdrop for further re-rating potential and likely a signpost for what may transpire for some other REITs.

Positioning for the recovery

A key question for investors is whether they continue to focus on the ‘stay at home’ theme or whether they start to position themselves for the ‘recovery’.

We have seen the ‘stay at home’ theme resonate throughout equity markets as companies that benefit from this trend – such as Amazon, Netflix and the like – experience soaring share prices. This has carried through into the A-REIT sector, with those groups having some association with e-commerce (logistics) or data (data centres) at high prices, while much of the traditional A-REIT sectors such as retail and offices at low prices.

In our view, some stocks at such extreme levels are over-extrapolating the ‘stay at home’ theme, whereas the reality is that there will be a return to normality as COVID-19 runs its course or when a vaccine is rolled out.

Therefore, we are positioning for the recovery trade, and there are some strong and compelling opportunities in real assets, which are out of favour at the moment that will benefit from the return to normality.

We are also seeing some good opportunities in alternative real estate, such as land lease communities, storage and childcare centres – which are currently a good source of income, diversification and re-rate potential.

However, we believe it is important to not overlook traditional core real estate in the A-REIT sector because that’s where investors can find the deepest value and some real opportunities in the current market.

 

Grant Berry is a Director and Portfolio Manager at SG Hiscock & Company. SG Hiscock & Company Ltd (ABN 51 097 263 628, AFSL 240679) may hold positions in companies mentioned in this article. This is general information and is not intended to constitute a securities recommendation. While the information contained in this presentation has been prepared with all reasonable care, SG Hiscock & Company accepts no responsibility or liability for any errors or omissions however caused.

 

RELATED ARTICLES

A-REITS are looking at M&A activity again

Luxury in a pandemic: five grand ways LVMH delivers grandeur

Five megatrends driving the Liquorice Allsorts of real estate

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.