REITs witness changing of guard

THE 2011-12 reporting season was dominated by news of management changes, with three key chief executives announcing retirements that will cause significant changes within the real estate investment trust sector.

By InvestSMART · 5 Sep 2012

By InvestSMART ·
5 Sep 2012

Comments

Matthew Quinn of Stockland and Peter Brown at FKP Property will be around until the end of the year, and Nick Collishaw at Mirvac leaves at the end of October.

But as the incumbents move on, their replacements will be armed with new strategies and outlooks to take the groups into the next phase of growth.

It is widely expected that a new chief executive at Stockland could look at changing the present three "Rs" strategy of retail, residential and retirement, while at FKP they will also look at the retirement business, which is under review by management.

The hardest hit of the asset classes was residential with all REIT managers marking down expectations for the coming year.

The dichotomy between the weak performance by individual retailers and their landlords persisted, with the latter saying the vacancy rate was a marginal 1 per cent and rents were still growing at about inflation.

For the office sector, despite redundancies in banking, finance and general clerical areas, the lack of new buildings across the country kept a lid on the vacancy levels. The only concern was the longer term impact of the $6 billion Barangaroo South project for the Sydney market.

Industrial property was stable but is starting to benefit from the rise of e-commerce, which requires warehousing for storage.

Analysts said the average REIT increased its 2011-12 financial year earnings per security by 2.7 per cent, which was 0.6 per cent above most forecasts. The head of property research at Bank of America Merrill Lynch, Simon Garing, said eight REITs beat his firm's forecast and there were no misses.

"Our 2013 financial year earnings per unit growth is now 2.4 per cent, with our forecasts being reduced slightly by 0.5 per cent, with the average distribution per security lifted by 0.3 per cent as payout ratios lift," he said.

"Office net operating income growth of 3.5 per cent was the highest, as most markets are below average vacancies and tenant incentive movements are largely unchanged. Retail was still very resilient, showing average net operating income growth of 3.3 per cent, despite negative leasing spreads for new tenants."

Mr Garing said residential developers faced the biggest challenges,, with earnings before interest and tax down 20 per cent, driven by low sales volumes and margins.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What management changes in the 2011–12 reporting season affected Australian REITs?

The 2011–12 reporting season saw several high‑profile retirements that will reshape the REIT sector: Matthew Quinn at Stockland, Peter Brown at FKP Property, and Nick Collishaw at Mirvac all announced they would be leaving. Their departures mean incoming CEOs may bring new strategies and outlooks for growth.

How could new CEOs change strategy at Stockland and FKP Property?

Analysts expect new leadership to reassess current plans: at Stockland this could mean revisiting the existing 'three Rs' strategy (retail, residential and retirement), while at FKP Property management is reviewing its retirement business, suggesting potential strategic shifts in those divisions.

Which REIT asset classes performed best and worst during the 2011–12 season?

Residential was the hardest hit, with managers marking down expectations for the year. Office sector net operating income grew the most (about 3.5%), retail remained resilient with roughly 3.3% NOI growth, and industrial property was stable and beginning to benefit from rising e‑commerce demand for warehouse space.

What did analysts report about REIT earnings per security and distributions?

Analysts said the average REIT increased 2011–12 earnings per security by 2.7% (about 0.6% above forecasts). Bank of America Merrill Lynch’s Simon Garing noted eight REITs beat forecasts and there were no misses. He also said 2013 EPS growth is now about 2.4% (forecasts trimmed by 0.5%) and average distribution per security was lifted by 0.3% as payout ratios increased.

Should investors be concerned about retail vacancies and rent growth?

While individual retailers showed weak results, landlords reported a marginal vacancy rate of around 1% and said rents were still growing roughly in line with inflation. That means retail property fundamentals looked relatively resilient despite retailer softness.

How is the office property sector holding up and what is a major risk to watch?

Office net operating income led growth at about 3.5% as most markets remained below average vacancy and tenant incentives were stable. A key longer‑term risk highlighted was the potential impact of the $6 billion Barangaroo South development on the Sydney office market.

What impact is e‑commerce having on industrial REITs?

Industrial property was described as stable and is starting to benefit from the rise of e‑commerce, which increases demand for warehousing and storage space — a positive structural tailwind for industrial REITs.

Why did residential developers and the residential asset class struggle?

Residential developers faced the biggest challenges: earnings before interest and tax were down about 20%, driven by low sales volumes and compressed margins. As a result, REIT managers marked down expectations for the residential sector going forward.