Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 216

Listed property report card for August 2017

We're midway through the August 2017 reporting season with Australian Real Estate Investment Trusts (AREITS) up 2% month to date. Most stocks have recorded strong capital gains (higher valuations), low debt costs and reasonable outlooks. There's been a 15% spread between the best and worst performers month to date with Charter Hall Group (CHC) up +11% and Charter Hall Retail (CQR) down -4%. The highlights are:

Ardent (AAD) – forced initiative

Management outlined their strategic initiatives to improve the customer offer plus evaluating excess land opportunities, which is in response to Ariadne's (ARA) proposals. There'll be more news flow about this name as we approach a vote to appoint new directors on September 4.

Abacus Property Group (ABP) – record result

ABP’s record was driven by higher rental income, fee income and profits from asset sales and developments. It could have been even stronger had local council elections and state agencies not delayed the timing of approvals at some sites, especially at Camellia in Sydney's west. ABP provided FY18 DPS guidance (the first time they have guided) of 18.0 cents per share (cps) or +3% growth.

Australian Unity Office (AOF) – office of suburbia

AOF exceeded its IPO forecasts, with outperformance driven by better leasing outcomes and borrowing costs. It offers a solid 6.8% distribution yield, with no significant single lease expiry until FY22 and conservative gearing of 27%.

Aveo Group (AOG) – money back guarantee

Aveo shares jumped 11% post their result, with a buyback announced and further enhancements to its Aveo Way Contract in response to recent media reports. Management is pro-active and have developed eight resolutions to improve customer experience, via improved buyback periods and money back guarantees, plus actively encouraging residents to get independent legal advice (or sign an acknowledgement they were advised to), financial advice and consult with their families.

Aventus (AVN) – bulky's good

Management is best of breed in this asset class, having lifted occupancy to 98% and converting more leases from CPI reviews to fixed growth. Tenants enjoy lower rental expenses in these bulky goods and super centres with occupancy costs (cost of rent divided by sales) around 9-10% versus up to 20% in larger shopping centres. Gearing is relatively high at 39% but some smaller asset sales should reduce this.

Bunnings (BWP) – won’t you stay with me

After many years of outperformance, BWP has been impacted by the upcoming and potential departure of the tenant (Bunnings) from 13 properties. They have an excellent core portfolio and strong balance sheet but these expiries will negatively impact underlying growth. Management is committed to maintaining the distribution at FY17 levels, even if they have to use capital profits from asset sales.

Charter Hall Group (CHC) – stepped off the Cbus

They don’t formally announce until next week but they did issue a statement saying that they have "determined not to proceed with further due diligence on the acquisition of Hastings Management Proprietary Limited". The stock rallied +4% on the news. The AFR reported that some investors in Hastings, including Cbus, were not happy with Westpac about the prolonged sale and some had questioned CHC's lack of experience in the infrastructure space.

Centuria Industrial REIT (CIP) – be careful what you wish for

The new management team is earning its keep, with occupancy down to 92% and gearing at 43%. The debt book was completely refinanced during FY17, with further asset sales likely. The stock is appealing because of the near 8% yield with a lot of leasing work required in FY18.

Charter Hall Long WALE (CLW) – long and strong

The result was as expected given the long-term nature of leases with no material vacancy until FY21. Higher income was offset by higher costs linked to debt and the simplification of its legal structure.

Charter Hall Retail (CQR) – tough times don’t last

The supermarket wars and soft retail conditions have resulted in low growth out of this stock, with investors rewarded via a relatively high yield. FY18 will see further repositioning (additional sales and developments) that will assist future growth. The price will be supported by a buyback, but this can only be used sparingly given their relatively high gearing.

Dexus (DXS) – blister in the sun

The market is excited about the strength of the Sydney and Melbourne office markets, with effective rents growing +32% in Sydney and +20% in Melbourne. Given the long-term leases in place it's hard to capture all of this at once, with the rental growth across the portfolio +2.6% during FY17. With the pressure on retail stocks, Dexus is enjoying its time in the sun.

Folkestone Education (FET) – kids are alright

Another strong result from management, with nearly 9% EPS growth in FY17 driven by rental growth, new development and lower interest costs. The portfolio WALE (or weighted average lease expiry) has increased to 9.1 years, due to new centre completions and lease extensions. The development pipeline continues to look healthy, with returns from new centres far superior to that achieved by acquiring existing centres on market.

GPT Group (GPT) – in Bob we trust

FY17 FFO guidance was upgraded to 3%, supported by lower costs and stronger than expected retail income. This stock is the ‘proxy’ for Australian real estate with exposure to all commercial sectors and the CEO (Bob Johnston) has done well to steady the ship. There's a few developments that could add a lot of value in the medium term.

ALE Property Group (LEP) – it's Woolies’ shout

The underlying portfolio is rock solid, 100% leased to a tenant 75% owned by Woolworths on 25-year leases (plus options) with annual CPI rent uplifts. Given broader market uncertainty, this portfolio is highly desirable and trades accordingly. They're nearing their first rent review in November 2018, which is capped/collared at +10/-10% and should lead to a substantial lift in dividends.

Mirvac (MGR) – Mirva-lous effort

This was the best result thus far, with all businesses delivering strong numbers. MGR has benefitted from a strong residential market to recycle and reposition its investment portfolio. They’ve taken profits from their residential business and redeployed into high quality commercial assets. Management has done a great job implementing the strategy. The retail portfolio performed well, focused on urban locations with higher densities. Not all retail is created equal.

Shopping Centres Australia (SCP) – CQR with a twist

As per CQR but they’ve boosted earnings by selling assets into retail funds (syndicates) that they control, and deriving fees from these.

Stockland Group (SGP) – better than expected

The FY17 result was stronger than expected, with record residential settlements coupled with strong margins boosting the overall return, and their gearing is down to 22%. Importantly their FY18 guidance was above consensus so look for upgrades to occur.

Vicinity (VCX) – the hard work’s done

VCX unveiled a solid underlying result that was overshadowed by a change in the distribution policy, targeting a payout ratio of 95-100% of AFFO for FY18. It's been a busy year for the management team, with divestments, developments, remixing of tenants and distribution changes. A new CEO was announced last week, with Grant Kelley returning to Australia after spending many years abroad, most recently as CEO of City Development Limited in Singapore.

Westfield Corporation (WFD) – been there, done that

Westfield delivered a solid half year result (they're a calendar year firm) and maintained FY17 guidance. Operationally, their better malls (Flagship) continue to outperform Regional assets. They have relatively high gearing of 38%, and will rely on partial asset sales to lower this. WFD referred to their extensive experience to see them through volatile trading conditions, referring to themselves as "industry leaders" and at the "cutting edge". However, the negative sentiment towards the sector shows no signs of abating and earnings growth has been lacklustre.

 

Pat Barrett is Property Analyst at UBS Asset Management. This article is not specific financial product advice and it does not take into account any individual investor’s investment objectives, tax and financial situation or particular needs. 


 

Leave a Comment:

     

RELATED ARTICLES

Australian banks prove resilient but risks remain

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 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.