Disregard Australand's latest results

Happily, our positive recommendation instituted on 22 Jan 10 (Long Term Buy – $0.475), wasn’t based on a pretty set of 2010 accounts. It was based on a cheap stock price and exposure to any turnaround in the property market which might benefit Australand’s development operations.

On that score, this coming year’s numbers will be more telling than last year’s. And 2011’s results may prove the ultimate test. In short, we’re trying to buy in the gloomy times, in anticipation of better conditions ahead.

Commentary not upbeat

It’s difficult to predict when those better times might arrive and management’s commentary was hardly upbeat; ‘While economic conditions are showing signs of stabilisation, the Group remains cautious about the outlook for the next twelve months. The fundamentals for the sector remain strong with population growth driving demand but this will be moderated in the short term by the expected pressure on affordability.’

The pros and cons continued in a similar vein; ‘It is expected that the lower and middle market segment demand from homeowners upgrading and investors returning to the market will offset the decrease in first home owner volumes which were pulled forward in 2009 by the various federal and state government stimulus measures. As a result, overall sales volumes are expected to remain consistent in 2010.’

The theme of positives offset by negatives didn’t let up when the talk turned to profit margins, either; ‘Whilst expected price growth will drive improvement in some project margins in 2010, there will be continued focus on monetising under-performing and completed projects and hence contributions from the division are expected to remain in line with 2009.’

Low expectations

So management isn’t expecting big things in 2010 on the development front. But those of us hopeful of a faster recovery might take some solace from the fact that management’s predictive powers aren’t perfect; failing as they did to spot problems ahead a few years ago (along with almost every other player in the listed property sector, it should be noted).

Yet the beauty of an investment in Australand is that today’s buyer is not dependent on a turnaround in development profits. Over the past seven years, the group has built up an investment portfolio of 70 office and industrial properties currently valued at $2bn.

This portfolio continues to perform well, with occupancy of 99.4% at 31 December, and only 9% of the portfolio’s leases (by income) expiring over the next two years. This provides Australand with a steady income stream – something which would turn most developers green with envy.

Attractive yield

That income stream should flow through to investors with a forecast distribution this year of 4.1 cents per security. If management can hit that target, today’s buyer would enjoy a yield of 9.0%. That’s rather attractive when coupled with the potential for capital gains if profits come through from the development operations over the next few years.

Risks include a property market that stays sluggish, lumbering Australand with the interest costs associated with its development inventory for much longer than expected. A significant fall in the occupancy level of its investment portfolio (no sign of that yet) would also hurt Australand’s ability to maintain its distributions.

If things go well from here, we can imagine Australand’s stock price trading above its current net tangible asset backing of 68 cents per security over the next few years. That would provide today’s buyer with a handsome capital gain of around 50% on top of their attractive income return. LONG TERM BUY.

For those who followed our advice on the Australand ASSETS (ASX code AAZPB) income securities on 29 Jul 09 (Buy for Yield – $67.00), we remain comfortable that your fat distributions will continue to roll in as well. At today’s prices, though, we have a preference for the ordinary securities which carry somewhat more risk along with their greater upside potential. The price of Australand ASSETS securities is up 9% since 20 Aug 09 (Hold – $75.52) and our recommendation remains unchanged since then. HOLD.