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Listed Property Trusts
2 stocks to watch in the beleaguered listed property trust sector
May 15, 2008
Brendon Lau, ShareAnalysis
Many continue to shy away from listed property trusts (LPTs) ever since the Centro debacle sent investors diving for cover. The silver lining is that several LPTs have made credible efforts to improve investor confidence. In the wake of the recent reporting season, we examine some emerging trends and highlight those that have built their businesses on firmer ground.
Over the past few months, close attention was given to gearing levels and debt-maturity profiles after Centro's debt-driven implosion. As the sector generally has a high payout ratio and a heavy reliance on capital raising to fund growth, more leveraged LPTs may have to cut distributions in order to rein in gearing levels.
The second trend in the sector is the shift in focus towards organic growth versus acquisition growth. This defensive strategy has favoured stocks with development or repositioning potential within existing portfolios, whereas LPTs with complicated structures are being eyed more suspiciously in the current credit turmoil.
Another area of concern has been overseas exposure. LPTs with substantial retail and commercial property assets in the US and the UK are exhibiting large implied cap-rate softening in their pricing, as the market attempts to forecast the extent of the credit crunch over the next 12 months. Management of offshore growth strategies has for the most part been frozen for now, as managers backtrack to try to consolidate positions on existing portfolios.
Meanwhile, 1H08 results have seen across-the-board improved market disclosure of underlying business structure, business strategy and capital management in an attempt to avoid being labelled as the next 'Centro'.
With an expected slowdown in growth in development and acquisition activity, there is also a greater emphasis on recurring rental income as a source of distributable income. Several LPTs have opted to take an up-front hit to better align DPS and EPS for the long term, as earnings consistency has been closely scrutinised this half year. The bad news is we expect further DPS cuts for FY09 for a lot of LPTs that have held back and decided to maintain previous DPS guidance for FY08.
The final trend we noted was a softening in cap rates, particularly for secondary-grade markets here and in the US. This trend has been somewhat anticipated, but until more transactions occur over the coming 12 months, we cannot quantify how much yield re-rating may occur. Should significant re-rating occur across the broader market, secondary assets with shallow investor depth will specifically be at risk, with a possible yield re-rating between 100-200 bps. This development could exert pressure on existing debt covenants.
However, there is some good news. LPTs with premium-grade assets should be able to maintain current value levels in the short term, as valuers appear to be maintaining cap-rate assumptions on the top end of the market. This could change, however, once larger assets start trading again. Naturally LPTs with premium assets and secured quality tenants with long leases in excess of 10 years will be better placed to withstand any yield re-rating in the short to medium term.
Two stocks in the sector we have a favourable view on are:
Challenger Diversified Property Group (CDI) announced it has completed an agreement to manage and upgrade the Domain car park in Sydney for a 25-year period. This development follows CDI's solid 1H08 result. With its conservative gearing and decent yield, we have a BUY on the stock with a 12-month price target of $0.94 (Technical Recommendation: BUY).
The Goodman Australia Industrial Fund (GAIF) has invested in a $970M trust portfolio of the Goodman Group (GMG). The equity offer was structured such that the GMG has agreed to retain a $600M interest in GAIF. We view the transaction favourably, as it would demonstrate GMG's ability to capitalise on global demand for quality Australian product in a time when domestic capital inflows remain difficult. We have a BUY on GMG with a 12-month price target of $4.68 (Technical Recommendation: BUY on weakness).
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Listed Property Trusts: 2 stocks to watch in the beleaguered listed property trust sector
Economics: Domestic and global economic snapshot
Crude Oil: How crude oil prices affect the price we pay at the pump
Stocks: 10 Highest Dividend Paying Stocks
Stock Picks: Aussie oil stock fuelled by rising oil prices
Author Note: What makes a great trader? Turtle Trader author explains trend following
Company: Indophil rejects Xstrata takeover offer
Economy: Australia ranks as competitive economy
2008 Budget: Economists salute Swan's budget
Companies: Iron ore expansions won't curb prices
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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