Trusts feel push for buyback

PRESSURE is mounting on Mirvac, Westfield Retail Trust and Goodman Group to offer investors a share buyback. In doing so, they would join other Australian real estate investment trusts that have made a bid to close the gap between their share price and net tangible asset value.

By InvestSMART · 13 Jun 2012

By InvestSMART ·
13 Jun 2012

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While not all the AREITS have a deep discount between the share price and NTA value, analysts remain concerned the gap is not narrowing quickly enough.

The chief executive of Mirvac, Nick Collishaw, has consistently said the board is reviewing a range of capital management initiatives, including a buyback.

The senior real estate investment trust analyst for Goldman Sachs Australia, Simon Wheatley, said the volatility of the sharemarket has had an impact on share buyback activity.

He said that since April two more REITs have started share buybacks: CFS Retail and Dexus.

"Strength in the REIT sector in April has meant many REITs have sat on the sidelines with regard to share buyback programs," he said.

The senior property analyst at Morningstar Equities, Tony Sherlock, said to date more than $1.46 billion had been bought back via the sharemarket and there is an estimated $2.6 billion in balance. He says in a new report that with most AREITs trading at large discounts to NTA assets, buybacks create clear value.

"This is already occurring en masse in the Australian property sector, with Commonwealth Property Office, GPT Group and Stockland Group all upscaling the scope of their buybacks," he said.

"The larger capitalisation property stocks not currently undertaking a buyback are Goodman Group, Westfield Retail Trust, Centro Retail Australia, Lend Lease and Mirvac ... We consider Mirvac has a lot to gain from a buyback, given its securities are trading at a 25 per cent discount to December 2011 NTA per security of $1.63."

At its half-year results in February, Mirvac's chief executive, Nicholas Collishaw, advised $200 million of proceeds from assets sales are required for the full-year 2012 operating cash and capital expenditure budgets.

Any proceeds over and above the $200 million "would be seriously considered by the board for use in a buyback".

Mr Sherlock said that with the completed asset sales, there are compelling grounds for a buyback. "Debt refinancing is not considered an impediment as Mirvac had $500 million of liquidity at December 2011 and near-term maturities of $140 million in January 2013," he said.

He said a 5 per cent and 10 per cent buyback, undertaken at $1.25 per security, would be acccretive to his 2014 financial year earnings per security forecasts.

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Frequently Asked Questions about this Article…

Why are investors pushing Mirvac, Westfield Retail Trust and Goodman Group to launch a share buyback?

Investors want these large AREITs to do share buybacks because many real estate trusts are trading at big discounts to their net tangible asset (NTA) values. Buybacks can help close the gap between share price and NTA and are seen by analysts as a way to create shareholder value.

What evidence is there that buybacks are already happening in the Australian REIT sector?

Analysts report that more than $1.46 billion has already been bought back via the sharemarket, with an estimated $2.6 billion in buyback capacity still available. Several REITs — including Commonwealth Property Office, GPT Group and Stockland — have upscaled their buybacks, and CFS Retail and Dexus recently started buyback programs.

Has Mirvac signalled it might undertake a buyback and what conditions did management set?

Yes. Mirvac’s CEO Nicholas Collishaw has said the board is reviewing capital management options, including a buyback. At the half-year results he said $200 million of asset sale proceeds are required for the company’s FY2012 operating cash and capex; any proceeds above that amount would be 'seriously considered' for a buyback.

How big is Mirvac’s discount to NTA and why does that matter for investors?

Tony Sherlock at Morningstar noted Mirvac’s securities were trading about 25% below the December 2011 NTA per security of $1.63. A large discount to NTA suggests the market price may undervalue the underlying assets, which is why buybacks are seen as a way to deliver clear value to investors.

Are there financial constraints that might stop Mirvac doing a buyback?

According to the article, debt refinancing is not seen as an impediment: Mirvac had about $500 million of liquidity at December 2011 and near-term maturities of roughly $140 million in January 2013. Analysts therefore consider there are compelling grounds for a buyback following completed asset sales.

How can a buyback affect earnings per security for long‑term investors?

Morningstar’s Tony Sherlock estimated that a 5% or 10% buyback at $1.25 per security would be accretive to his 2014 earnings‑per‑security forecasts. In general, reducing the number of securities outstanding via buybacks can increase earnings per security for remaining holders, all else equal.

How has market volatility influenced REIT share buyback activity?

Simon Wheatley, a senior REIT analyst at Goldman Sachs Australia, said sharemarket volatility has affected buyback activity. He noted that strength in the REIT sector in April led some trusts to sit on the sidelines regarding buyback programs, while others moved forward when conditions were appropriate.

Which large property stocks are notably not undertaking buybacks right now?

The article lists several larger capitalisation property stocks not currently running buybacks: Goodman Group, Westfield Retail Trust, Centro Retail Australia, Lend Lease and Mirvac — though Mirvac has indicated it is reviewing the option.