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In the August 2017 reporting season, most Australian Real Estate Investment Trusts (A-REITS) recorded reasonable outlooks including lower debt costs. The highlights were:
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
As per CQR but they’ve boosted earnings by selling assets into retail funds (syndicates) that they control, and deriving fees from these.
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.
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 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.
Content first published in the financial newsletter cuffelinks.com.au on 24 August 2017.