The Australian real estate investment trust – or A-REITs – sector is not spoken of as a great prospect at the moment, being caught between a rising bond yield environment globally, and low inflation domestically. Earnings growth figures for the REIT sector is expected to be flat in FY17, although unfranked yields in the 5%–6% range keep many of the major trusts well supported: however, fairly full pricing is par for the A-REIT course at present.
But here are five prospects where the total return opportunity – capital growth plus distribution yield – gives a slightly better picture for investors.
Westfield Corporation (WFD) $9.01
Market capitalisation: $18.3 billion
Forecast FY17 yield: 3.4%, unfranked
Analysts’ consensus target price: $10.19 (FN Arena)
Implied upside: 13.1%
One of the behemoths of the A-REIT world, Westfield Corporation owns and operates the Westfield Group’s shopping centre assets outside Australia – since the 2015 split that hived off the Australian and New Zealand assets into Scentre Group. Westfield owns 35 shopping malls in the US, UK and Europe (its Westfield Milan development, scheduled for early 2018, will be its first in Europe), a portfolio of very high-quality assets. Because this portfolio generates all of its earnings overseas, Westfield is exposed to currency risk – but it is also a good way to “play” a weaker A$ environment.
Westfield has assets under management of US$30.9 billion ($40.1 billion), of which 82% are what it calls “flagship” assets – these are the malls that generate the most in specialty sales, and thus the strongest returns. The flagship assets are 96% occupied. Westfield puts a lot of work into designing the tenancy base of its flagship centres – the newer centres will feature a population of cutting-edge retailers in food, entertainment, technology, health and fitness, cosmetics, high street fashion and car brands. The prime locations of the portfolio virtually assure Westfield of high-value tenants wanting to come on board.
The group’s development pipeline stands at US$9.5 billion ($12.3 billion) – this is due to enter service by 2020-21. As these properties come into the portfolio, Westfield should be able to unlock further value by selling interests to institutional investors.
The flagship of the flagships is the US$1.2 billion ($1.5 billion) World Trade Center (sic) shopping mall in New York, opened in 2016. As investors would hope from such a high-profile site, Westfield says WTC is already the “most productive” asset in the portfolio. The WTC site is at the heart of Westfield’s strategy to reposition most of its 35 shopping malls in the US, UK and Europe into flagship assets. The redevelopment program also includes thousands of new apartments to be built at Westfield shopping centres.
In this way, Westfield continues to defy the tough times in retail: the company says that while there are constant reports of traditional department stores closing, it continues to attract them into its stores. It is also, surprisingly enough, luring the big online retailers: Amazon has opened a store in University Towne Center (UTC) in San Diego, and will also open stores in the Garden State Plaza in New Jersey, and some of the group’s newer projects.
But the company is taking a bit of short-term earnings pain as it focuses on creating long-term asset value through developing the flagships. In 2016, funds from operations (FFO) rose by 3.8% to US$700 million ($909.1 million) – at the lower end of already downgraded guidance – while net profit came in at US$1.37 billion ($1.77 billion), down 41%. Revenue slid by 7.3% to US$1.8 billion ($2.6 billion), while the full-year distribution of 25.1 US cents (32.6 cents) was in line with forecasts. This year Westfield forecasts a 25.5 US cents distribution.
The Brexit and Trump votes hit the Westfield share price, because they were seen as affecting Westfield’s core operating markets – the stock is down 18% since the Brexit vote at the end of June. The 2016 result didn’t do much to redress this, but it does mean that on analysts’ consensus target price, Westfield trades at a nice cheap entry point.
The global shopping centre giant is not the most lucrative yield proposition of the REITs, but if you’re thinking in terms of total returns, Westfield looks attractive at current prices. It looks to be trading a lot higher than its net asset value (NAV) at US$5.49 ($5.96) – but on Westfield’s strong track record of project development value creation, and adding back deferred US tax, most analysts see the stock as trading at a significant discount to its “real” asset value.
Astro Japan Property Trust (AJA) $6.07
Market capitalisation: $368 million
Forecast FY17 yield: 6.8%, unfranked
Analysts’ consensus target price: $7.34 (Thomson Reuters)
Implied upside: 20.9%
Another overseas property portfolio is Astro Japan Property Trust, which owns a portfolio of 39 retail, office, residential and hotel properties, mainly in the Tokyo area – 85% of the assets are in greater Tokyo. Like Westfield, Astro Japan is exposed to currency risk – but it is also a good investment to pick up on a strengthening Japanese yen.
That has certainly been happening lately: the stronger yen against the Australian dollar helped to push Astro Japan’s FY16 result above broker expectations, and in the December 2016 half the 9% strengthening of the yen against the A$ was the main contributor to the underlying net profit rise of 6.4% to $18.3 million, more than compensating for a fall in net property income that followed the sale of some smaller properties. The portfolio value edged ahead by 0.5% in the half year, with six of nine properties that were revalued in the half showing an increase.
That does not sound screamingly attractive but the situation is better than it looks: having sold some properties, Astro Japan now holds $45 million worth of cash – equal to about 10% of current net tangible asset (NTA) value – and is looking to put that cash into improving the portfolio, by buying younger properties with stronger cash flows than the ones it has recently sold.
Analysts actually expect earnings per share (EPS) to come down in FY17, but expect the distribution to be lifted by about 14%, to 41 cents a share, which puts Astro Japan on a 6.8% unfranked yield. And the dividend is high-quality, wholly paid from operating and investing cash flows. Astro Japan trades at a 20% discount to NTA, but management’s plans to use its cash stash to increase earnings should help to close this gap. The stock also trades at a hefty discount to its analysts’ consensus target price, giving an attractive total return proposition for the level of risk.
Garda Diversified Property Fund (GDF) $1.075
Market capitalisation: $121 million
Forecast FY17 yield: 8.7%, unfranked
Analysts’ consensus target price: $1.17
Implied upside: 8.8%
Listed in July 2015, the Garda Diversified Property Fund owns six commercial assets and two industrial properties, mainly in Queensland (two commercial properties in suburban Melbourne). It’s a small portfolio, but reasonable quality, that focuses on properties valued in the $20 million–$50 million range. Currently the portfolio has 93% occupancy – but the weighted average lease expiry (WALE) figure of 3.8 years is one that investors would like to see extended in the next few years.
GDF had a good recent half-year (to December 2016), with funds from operations (FFO) surging by 28.5%, to $5.2 million, and total distributions lifting 13.3%, to $4.8 million. The distribution payout ratio of 93.6% (at the December half-year) is strong, with a 53% tax-deferred component. Total property assets rose by 29.8%, to $182.6 million, representing a distribution facility (wholly leased to Wesfarmers subsidiary Blackwoods until 2029) that was bought in August: net tangible assets (NTA) per unit increased by 8.8%, to $1.11.
As it looks to diversify its portfolio further, GDF is specifically seeking industrial assets in Brisbane and Melbourne, and commercial office assets in Canberra and Melbourne. The forecast distribution for FY17 expects 9.4 cents, up from 9 cents in FY16, which places GDF on an unfranked yield of 8.7%. Analysts see the distribution lifting to 9.7 cents in FY18, for a yield on the current price of 9%. With the scope for appreciation that analysts see, the total return prospects for GDF look attractive. The fund also trades at a slight discount to NTA. GDF is a small operator, it is not glamorous, but it knows its sector of the market well, and sticks to it.
Elanor Investors Group (ENN) $2.07
Market capitalisation: $183 million
Forecast FY17 yield: 7.3%, unfranked
Analysts’ consensus target price: $2.44
Implied upside: 17.8%
Established by former Macquarie real estate head Bill Moss and listed in 2014, Elanor Investors Group is not strictly a REIT: it is a private equity investment company that invests in tourism, leisure and commercial property assets as manager of third-party-owned funds and syndicates, as well as direct investments on its balance sheet.
Elanor co-invests in its funds. Last year it amalgamated two unlisted property funds into the Elanor Retail Property Fund (ERF), which it listed in November. It also operates the Elanor Commercial Property Fund and the Elanor Hospitality and Accommodation Fund, and also owns directly some hotels and tourism properties.
Elanor aims to be a consolidator in highly fragmented property markets. The group manages $646 million of property assets: total funds under management and balance sheet investments stand at $774 million. The funds management operation throws off management fee revenue that is typically about 1% of gross assets, which gives a solid annuity income flow: the funds management operations are expected to contribute more than half of group earnings this financial year, up from one-third in 2015.
The group can apply operating leverage on its fixed-cost base to boost margins, and also pick up an acquisition fee when it buys a property for its managed funds. It’s a sound model, based off a strong balance sheet. Analysts expect a 15.1-cent distribution in FY17, giving a yield of 7.3%: in FY18, the forecast 15.9-cent distribution equates to a yield of 7.7%. The stock’s analysts also make a case for significant room for capital growth.
Hotel Property Investments (HPI) $2.78
Market capitalisation: $410 million
Forecast FY17 yield: 9.3%, unfranked
Analysts’ consensus target price: $3.01
Implied upside: 7.1%
As the name suggests, Hotel Property Investments specialises in pubs: it owns 48 properties in Queensland and South Australia, 41 of which are pubs, and there are also seven detached bottle shops in Queensland. The pubs – which also contain gaming outlets –are leased to the Coles group and to Australian Leisure & Hospitality (ALH), a joint venture 75% owned by the Woolworths group.
The great bulk of the income – 95% – comes from the hotel leases to Coles and ALH, with 5% generated by specialty tenants that lease the on-site specialty stores: these tenants include a mix of franchisors and franchisees, including 7-Eleven, Nightowl, Nando’s, Subway, Noodle Box and The Good Guys.
Hotels, bottle shops and gaming will not suit every investor – but Australians’ habits being what they are, HPI certainly throws off a very solid yield. The company is guiding the market to expect 32.1 cents a share in FY17, which would represent a yield of 11.5%: the analysts’ consensus is a touch more circumspect, expecting 26.2 cents – which is still enough for a 9.3% yield. Consensus also expects the distribution to lighten off to 20.1 cents in FY18, lowering the yield (on the current price) to 7.1%. But with the same figure of potential price appreciation expected by analysts, that can be parlayed into an attractive total return.
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