Australand Holdings

Australand’s half year result (again) didn’t produce any surprises. Operating profit rose 5% to 11.8 cents per security for the half year ending 30 June over the same period last year (it has a calendar year end). Distributions for the period remained unchanged at 10.5 cents per security, placing Australand on a yield of 7.6%. This improved performance was driven by the company’s $2.3bn commercial and industry property portfolio where, despite a slight fall in occupancy to 98.7%, contracted rent increases lifted income.

Australand’s commercial, industrial and office development activities continue to enhance returns. Its flagship development at 357 Collins Street in Melbourne, for example, will yield nearly 9% on cost when completed later this year, and add a new $200m asset to the investment portfolio.

The company’s residential division, however, continues to hamper results. And it explains why Australand’s security price continues to trade at a 20% discount to its net tangible assets of $3.46 per security. The division’s return on capital employed languishes at less than 9%; well short of an adequate return for risky property development. Management are aiming to boost returns to 12%. This will prove difficult, especially with over 50% of the company’s development activities focused on the weakening Victorian property market. If returns aren’t improved we’d support a staged withdraw from the sector.

The situation at Australand remains relatively unchanged since 07 May 12 (Hold – $2.74), as does the security price. HOLD.

Note: The model Growth portfolio own securities in Australand.