Solid Result Season For Oz REITs

This story features MIRVAC GROUP, and other companies. For more info SHARE ANALYSIS: MGR

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

– Australian REITs outperformed broader market in February
– Profit results generally better than expected
– Forecasts lifted on solid outlook commentary

By Chris Shaw

Australian REITs (Real Estate Investment Trusts) outpeformed the broader market by 0.9% in February, delivering a total return according to BA Merrill Lynch of 3.2%. Year-to-date the sector has gained 5.7%, which is 3.2% above the broader market.

The performance reflects solid earnings results across the sector, BA-ML noting of the 23 REIT results within the broker's coverage universe 16 delivered better than expected results. Deutsche Bank was similarly positive, noting forecasts were beaten by 0.9% on average.

In the view of Deutsche Bank results were boosted by lower debt costs, this thanks to reduced borrowing margins and a rundown of excess liquidity. This reflects the handing back of some undrawn facilities, BA-ML attributing this to an improvement in debt markets.

Strongest results according to Deutsche Bank came from residential focused stocks such as Mirvac ((MGR)), Australand ((ALZ)) and Stockland ((SGP)), while development returns are also showing signs of improvement

JP Morgan also picked up on this, pointing out higher pre-sales and stronger tenant demand are indicative a recovery is under way. Net operating income (NOI) expectations reflect this, as solid cumulative growth of 8.6% through FY13 is expected in what should be a gradual rather than rapid improvement.

Best overall performers in February according to JP Morgan were the diversified and industrial REITs, while office and retail sectors underperformed slightly. Industrial REITs have been the best performers over the last three months.

Another positive from reporting season according to BA-ML was a cautiously optimistic tone from management teams, as in general earnings guidance was maintained or lifted to the top of prior ranges despite further interest rate increases in the second half of last year and natural disasters impacting on the retail sector.

Post result season BA-ML has lifted earnings per share (EPS) forecasts for FY11 by 1.6% on average, while longer-term EPS forecasts were essentially unchanged. JP Morgan lifted FY11 estimates by 2.3% on average on the back of profit results, while Deutsche Bank increased its numbers by an average of 0.4%. 

Having factored in the changes to its numbers, JP Morgan estimates the Australian REIT sector is trading at a discount to assessed net present value of 6.2% as at the end of February. This compares to a discount of 6.9% at the end of January. Net tangible assets also appear to have stabilised and are now expected to head higher.

Looking out three years, BA-ML is forecasting capitalised annual growth in EPS of 5.5% over the period. Adding in dividend yields, BA-ML is forecasting an implied total sector return of 13.4%.

Deutsche Bank expects over the balance of FY11 retail portfolios are still expected to deliver better relative performance compared to office markets, as for the latter group bullish commentary is yet to translate to improved income performance.

Post the REIT result season Deutsche Bank's top picks are Goodman Group ((GMG)), Stockland and Westfield ((WDC)), all of which are rated as Buys. The broker also has Buy ratings on Mirvac and Australand. 

Key picks for BA-ML are CFS Retail Property ((CFX)), Stockland and Mirvac, While also rating Westfield, GPT ((GPT)) and Lend Lease ((LLC)) as Buys, while the broker's top small cap pick is Charter Hall Office ((CQO)).

In terms of how these stocks stack up according to consensus views, the FNArena database shows sentiment indicator readings of 0.7 for Mirvac, 0.6 for Lend Lease, 0.4 for Goodman Group and GPT, 0.3 for Stockland and CFS Retail, 0.2 for Australand, 0.1 for Westfield and minus 0.2 for Charter Hall Office. 

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