Property trusts have come home, chastened and energised

Trimmed of assets and pared of shares, REITs such as Mirvac, Stockland, Westfield and GPT Group look to be back on track, writes Carolyn Cummins.

Trimmed of assets and pared of shares, REITs such as Mirvac, Stockland, Westfield and GPT Group look to be back on track, writes Carolyn Cummins.

FINANCIAL engineering through asset sales and share buybacks were the dominant themes in the recent reporting season for the real estate investment trust (REIT) sector.

After six months of juggling a tough retail environment, exiting from overseas businesses and some management changes, the REIT industry reckons it is back on track.

But the focus for managers remains to lift the return on equity (ROE) and narrow the gap between net tangible asset (NTA) value and the share price, and that can only be done by reducing the number of shares on issue.

Of the four largest REITs Westfield, Mirvac, Stockland and GPT Group all bar Mirvac are undertaking share buybacks and selling assets.

After absorbing the news, as given out by the REITs for the half-year (Mirvac and Stockland) and full year (Westfield and GPT), property analysts said, in general, these four were the top picks.

John Kim of CLSA said of the results that Stockland had the highest value of sales, at $745 million, with GPT in second spot, at $617 million. But it was Westfield that stole the show with a joint-venture deal with the Canadian Pension Plan and a surprise 10 per cent share buyback.

In a sector breakdown, limited development of new buildings kept office rents ticking along, while retail landlords did well despite the weaker state of the tenants. E-commerce is proving a bonanza for the industrial property businesses as the more we buy on the internet, the more warehouses are needed for storage and distribution.

Although some investors are sceptical that the REITs could not find a better use for their cash than buying back their own shares, others argue that it will boost share prices, which have been languishing since late 2008.

Simon Wheatley, senior REIT analyst for Goldman Sachs Australia said that, on reflection since reporting season, rent growth from several real estate subsectors had proven resilient, with only minor moderation in growth rates, and results had highlighted that the fixed (contracted) rent growth in non-expiring leases was carrying continued growth.

"Occupancy levels have remained strong occupancy is the primary risk to comparative net operating income for both office and retail," he said.

"There is no evidence of any loss of occupancy in shopping centres, and office occupancy remains stable although we suspect it has peaked and will soften into the end of financial year 2012.

"We did come away from reporting season with weaker conviction regarding the residential outlook."

Simon Garing, head of property research at Bank of America Merrill Lynch said that capital management and lifting ROE continued to be key focuses.

"This encompasses continued buybacks with GPT and Stockland buying back stock post results, and also continued asset recycling and management of debt and hedging.

"Westfield joined the list with its announcement of a $9 billion war chest and a 10 per cent buyback program to commence in March."

Mr Garing said Mirvac showed it was on the right track, doubling its development work.

"Mirvac's investment division continues to surprise on the upside with best-of-class momentum in its commercial development pipeline. Mirvac remains the third of our top three picks of the major REITs."

On Westfield, brokers said that with the profits from the Stratford mall in east London, now joining the profits from Sydney City, near-term earnings certainty was greatly increased.

Mr Garing said that Westfield's long-term growth, above the underlying and built-in rent escalations, would come from the core $11 billion development pipeline and other "blue-sky" growth through mega-mall projects in new markets, like the Milan and World Trade Centre, New York, projects, as well as through further expansion in higher-growth markets like Brazil.

Stockland, brokers said, more than than most, was trading on consumer sentiment and mortgage rate moves by the local banks.

One broker said its three "R" (retail, retirement and residential) strategy, while differentiating it from its peers, was moving against the appetite of the marginal equity investor, who seemed to be nervous about residential and retail, with retirement not proving to be the recurrent earnings yet that Stockland had hoped.

Looking at GPT's results, analysts said that after taking what they called "easy wins" from the focus on reducing overheads and debt costs, GPT must now focus on improving ROE by increasing its funds management business, enhancing development profits and buying higher-yield industrial to allow it to trade nearer to NTA.

"GPT's retail metrics are showing signs of stress with arrears increasing 30 basis points . . . with vacancy picking up to 60 basis," Mr Garing said. "We believe these metrics will deteriorate further, thus reducing earnings-per-share growth."

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