REITs worth looking at

Financial journalist
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Pockets of good value are emerging in the A-REIT space – especially if the improvement in the domestic economy continues – after a slow year in 2013.

In 2013, the S&P/ASX 200 A-REIT Accumulation Index – which measures distribution yield plus capital gain – generated a 7.1% return, less than half the 20.2% return of the S&P/ASX 200 Accumulation Index.

The A-REITs parted company with the broader market in May 2013, heading south. It was not that there was anything massively wrong with the REITs: according to APN Property Group, the December 2013 interim reporting season was largely in line with expectations, with earnings per share (EPS) rising by 3.3% and distributions (dividends) per share (DPS) lifting by 5.7%, on a weighted average basis.

Payout ratios were boosted from a sector average of 80.7% a year ago, to 83%. The REIT stocks are generally trading on sound fundamentals, with gearing across the sector below 30% (debt to total assets),

But the REIT sector suffered in the latter half of 2013 from a number of factors, most notably rising bond yields, with the Australian 10-year government bond yield moving from 3.8% to 4.2% (REITs tend to do better when bond yields are lower); and the general move away from defensive stocks to ‘growth’ stocks as the US Federal Reserve began its ‘tapering’ of its bond-buying program.

A sector approach or bottom-up?

Looking at the sectors, retail looks to be poised for a strong 2014. Vacancy rates are low, and the reporting season outlook statements showed that retail trusts were fairly confident in the increasing confidence of shoppers to spend. The REITs that own the shopping centres are a safer way to play this theme than their listed-company tenants.

The office market is challenging, with the smaller markets of Brisbane and Perth looking at looming over-supply, while Sydney and Melbourne appear far more solidly based. The higher-yielding industrial sector is well balanced between supply and demand, although reporting season did see higher vacancy levels. Residential is on the move as low mortgage rates drive housing activity and dwelling approvals hit record highs.

However, the best way to view the REIT sector at the moment is ‘bottom-up,’ where you’re looking for the best stock-buying opportunities rather than trying to work out which sectors are likely to do best, and then choosing stocks within those sectors.

A good approach, which not enough investors use, is to look at the collected wisdom of the professionals who know the REIT (this approach works with any sector: we used it on mining services companies earlier in the month) stocks best – the analysts who follow them, day-in, day-out. I like to use the consensus target price forecasts collated by the FN Arena database: this gives you the stocks the analysts feel have the most upside over the medium-term.

Because REITs are collecting rental income and passing it on to their investors as unfranked (but tax-deferred) income, you can also get a fairly good idea as to the yield you can expect, from consensus yield estimates.

The pick of the bunch

Picking through the REIT sector at the moment, here is the kind of share upside that the analysts’ consensus reckons exists (I have only listed the REITs where the analysts believe there to be any upside!) Because we’re three-quarters of the way through FY14, I’ve used the FY15 yield estimates – sadly, you can’t add these two figures to get a ‘total return’ outcome – the yield return might not come through in the same timeframe as the stock (hopefully) rising in value to meet its analysts’ consensus forecast, but it’s a good start.

I also added APDC Group, because it has a unique exposure to a powerful business theme: ‘cloud’ computing, and the need for data storage; and 360 Capital Industrial Fund, because its prospective yield is worth looking at, and the fund expects a large revaluation of property portfolio at FY14 full-year.

I like the spread of exposures that the big diversified groups give, such as Dexus Property Group and GPT, and particularly those that give some access to the residential property rebound, for example Mirvac Group and Stockland.

For specific investment exposures I like the retail story of Westfield Retail Trust – soon to become Scentre Group, holding all of Westfield Group’s Australian and New Zealand businesses – and for a really niche investment, APDC Group, because of the unique nature of its data storage centre portfolio.

Other niche exposures that might be considered include Generation Healthcare REIT (GHC), which offers a prospective FY15 yield of 6.4%, and National Storage REIT (NSR), the market’s only pure-play storage trust, which is projected to be on a FY15 yield of 8.8%, but while these smaller trusts can definitely add some spice to a REIT portfolio – when blended with larger, more diversified names – they are not followed by many analysts, meaning you are flying slightly blind on their capital-growth prospects.

Westfield Group (WDC)

Global shopping centre group.

Current return on equity: 5%
Current return on assets: 11.30%
Forecast FY15 Yield: 5.2%
Consensus target price upside: 12.8%

CFS Retail Property Trust (CFXDA)

Australian shopping centre portfolio.

Current return on equity: 4.6%
Current return on assets: 6.5%
Forecast FY15 Yield: 7.4%
Consensus target price upside: 10.8%

Westfield Retail Trust (WRT)

Australian and New Zealand shopping centre portfolio.

Current return on equity: 4.3%
Current return on assets: 5.6%
Forecast FY15 Yield: 7.0%
Consensus target price upside: 9.8%

GPT Group (GPT)

Australian retail, office and logistics and business park portfolio.

Current return on equity: 6.0%
Current return on assets: 8.4%
Forecast FY15 Yield: 6.1%
Consensus target price upside: 9.7%

Stockland (SGP)

Australian retail, office, industrial, residential and retirement-centres portfolio.

Current return on equity: 6.2%
Current return on assets: 10.8%
Forecast FY15 Yield: 6.6%
Consensus target price upside: 9.4%

Growthpoint Properties Australia (GOZ)

Office and industrial property portfolio.

Current return on equity: 6.8%
Current return on assets: 12.3%
Forecast FY15 Yield: 8.0%
Consensus target price upside: 9.2%

Dexus Property Group (DXS)

Australian retail, office and industrial portfolio.

Current return on equity: 8.6%
Current return on assets: 13.0%
Forecast FY15 Yield: 6.5%
Consensus target price upside: 8.3%

Australian Industrial REIT (ANI)

Industrial property portfolio.

Current return on equity: 3.3%
Current return on assets: 7.1%
Forecast FY15 Yield: 9.0%
Consensus target price upside: 7.3%

Mirvac Group (MGR)

Stapled-security offering exposure to residential, office, industrial, hotel and car-park properties.

Current return on equity: 7.2%
Current return on assets: 11.4%
Forecast FY15 Yield: 5.6%
Consensus target price upside: 7.1%

Charter Hall Retail REIT (CQR)

Shopping centre portfolio, anchored by supermarkets.

Current return on equity: 6.4%
Current return on assets: 10.9%
Forecast FY15 Yield: 8.0%
Consensus target price upside: 6.4%

Goodman Group (GMG)

Industrial property portfolio in Australia, Europe and the UK.

Current return on equity: 2.9%
Current return on assets: 4.4%
Forecast FY15 Yield: 4.6%
Consensus target price upside: 5.8%

APDC Group (AJD)

The only listed REIT that owns data centre assets.

Current return on equity: 4.8%
Current return on assets: 6.1%
Forecast FY15 Yield: 8.4%
Consensus target price upside: n/a

360 Capital Industrial Fund (TIX)

Industrial property portfolio.

Current return on equity: 3.8%
Current return on assets: 7.1%
Forecast FY15 Yield: 8.8%
Consensus target price upside: n/a

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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