Solid reporting season for AREITs

Pat Barrett

UBS Asset Management

It was a solid reporting season for AREITs, with improvement in most key metrics and positive outlooks. The good news was the continuing strong demand for quality real estate, that saw asset values / NTA's rise, plus the strength of the Sydney and Melbourne office markets. A challenging retail outlook is still impacting performance, however the retail landlords appear well placed to weather the storm. Importantly, balance sheets are in excellent shape with relatively low gearing and long term debt in place. The second half of the month saw the following companies report:


Arena (ARF) – From little things, big things grow

Another strong result from management, with operating profit up +12% and +9% distribution growth since FY13. The portfolio WALE has increased to 12 years, due to new centre completions and lease extensions. They are benefitting from 0–4 year old population growth and rising two-income families in their early learning centres (86% of asset value), and from the aging population in their healthcare portfolio (14% of value). The outlook is for 11% earnings growth and is one of the reasons why we like the social infrastructure space (ARF and FET).


Charter Hall (CHC) – Clearly Happy Clients

Another excellent result from the team, with strong FUM growth, strong asset and fund returns, plus lots of transactions and fees. Investors should be delighted with a six year CAGR (growth pa) of 10.5%. Given their success they're now impacted by a higher earnings base and tax payments. CHC have been sector leading in terms of product innovation (pubs and other long WALE) and retail investor satisfaction/returns.


Cromwell (CMW) – Weighed down

The result was impacted by asset sales which are dilutive, with FFO down 8% during FY17 and FY18 expected to be down another 5%. The balance sheet still has relatively high gearing at 45% but CMW assume their IOF stake will be sold in FY18 and the proposed Singapore REIT IPO proceeds.


Industria (IDR) – Abell to grow earnings

A good result with management delivering at the top end of guidance. The highlight was strong leasing progress at Rhodes and improvement at Brisbane Technology Park (BTP) that led to a strong NTA uplift. Their acquisition of Westrac Newcastle has already seen a 16% uplift. IDR is also the subject of potential corporate action with Growthpoint acquiring ~18% of issued stock.


Investa Office (IOF) – I can see clearly now

Pleasingly the focus was on the office market and not on corporate activity, with NTA (portfolio value) growing 13% while distributions grew 3%. Management delivered like-for-like NPI growth of just ~2%, reflecting downtime at 126 Phillip St, Sydney and 140 Creek St, Brisbane. The cost of leasing deals in FY17 (capex and incentives) negatively impacts the FY18 result. The repositioning works at the Sydney assets (347 Kent and 388 George) over FY19–FY20 are well timed but the benefits are long dated. IOF also announced a potential 5% buyback that will support the share price.


GDI Property (GDI) – Betting on Perth

It's refreshing to meet management who are focused on taking advantage of property cycles, buying below replacement cost in Perth and selling well above in Sydney. While the market struggles with the "lack of visible earnings growth", the capital returns at an asset level have been excellent. Significant profits have been realised, highlighted by the sale of 66 Goulburn St ,Sydney for an effective sales price of $228m vs their original purchase price of $136m. Most of their eggs are now in the Perth basket.


Goodman Group (GMG) – 3D = de-lever, de-risk
and deliver

Goodman has done a tremendous job given their size and complexity to reduce gearing significantly while delivering strong earnings growth and price performance. If they didn’t de-gear they'd have recorded ~10% EPS growth pa vs the ~7% pa delivered. Gearing could reach 1% (13% look-through) by the end of FY18 if they complete their intended non-core asset sales.

Growthpoint (GOZ) – Acquisitive

Numbers were boosted by the addition of the GPT Metro Fund (GMF) and the delay in asset sales to reduce gearing.  Management reiterated FY18 guidance below FY17 due to recent asset sales, however further leasing success plus the recent acquisition of a Perth industrial asset and stake in Industria REIT (IDR) will enhance numbers.  Growthpoint are the quiet achievers in the REIT space.


Lend Lease (LLC) – The octopus

A strong result from a business with more moving arms than an octopus.  The development division (40% of EBITDA) and investment division (36% of EBITDA) delivered excellent results, with both divisions exceeding expectations, while the construction division (24% of EBITDA) recorded a weaker margin. LLC is a world class operator with a $50bn development pipeline, a $21bn construction book and FUM of $26bn.  Management has done a fantastic job of managing the risks to date. 


National Storage (NSR) – Deja-vu

Management has well driving both occupancy levels and price, with earnings traditionally boosted via acquisitions.  The year ahead looks to be another repeat, with acquisitions identified and gearing expected to hit its upper band (40%), that should lead to another capital raising.


PropertyLink (PLG) – One down

Management will be relieved to get year 1 out of the way, with the price responding positively to asset recycling and strong leasing.  It should be appealing to retail investors given its high relative yield (~8.5% prospective distribution yield) and conservative earnings guidance. 


Peet (PPC) – East coast tailwind

It was a good result from PEET, with solid improvements across all key metrics. The result was driven by strong conditions in the East Coast, with the group seeing pricing 5–15% ahead of feasibility for a number of its projects. Conditions remain subdued in WA, but that is of less relevance now given it's 14% of EBITDA versus 39% in FY14. 


Rural Funds (RFF) – Foraging for growth

It was a year of significant growth for RFF, with cattle properties, cotton properties and water entitlements purchased.   They remain acquisitive with reasonable gearing levels and the FY18 outlook was for a solid 4% distribution growth. 


Scentre (SCG) – Getting on with it

They can't control the markets perceptions about retail stocks but they can control their customer and tenant appeal.  As such they have been doing the necessary deals to ensure their centres have the best tenants, which will draw traffic and dollars in the medium term.  They reaffirmed CY17 guidance (it was a 1H17 result) and announced that they would lower their payout ratio to provide funding room for future capex (sensible).  SCG have delivered a weighted average development margin of 58% since 2004 and it's hard to question their development pipeline, with SCG commencing A$900m of developments in 1H, and a further A$3bn in pre-development.  The depth and breadth of their expertise is unmatched in the retail space but this is being ignored as negative sentiment (not facts) prevails.


Viva (VVR) – No bowser shock

Viva reported their 1H 17 result slightly ahead of forecasts, given lower corporate costs, and reiterated CY17 EPS guidance of 13.2cps (~6% EPS yield). Their assets have not been valued since July 2016 and given comparable sales for Long WALE assets (long leases), we expect some good capital upside.  The sceptics are worried about the impacts of driverless cars, with management providing a slide showing that electric vehicle sales represented <0.1% of new car sales in Australia in 2016, and in fact fell 35% from 2015 to 2016 (1195 EV cars sold in 2015 vs 769 in 2016). Given the service station locations (largely inner city and major roads) we think these would be keenly sought in a worse-case scenario, with many players fighting for control; eg. Amazon could buy them as the last mile distribution centre.  


UBS Asset Management

Pat Barrett has twenty five years experience in the listed and direct property industries, most recently covering property securities, infrastructure and utilities analysis at UBS.

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