Will Australian LPTs Consider Equity Raisings?

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

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

By Chris Shaw

With access to capital much tougher since the sub-prime lending crisis
it is no surprise a topic of conversation at the recent Property Council of Australia’s Capital Market Summit was gearing and access to debt in the Australian listed property trusts sector, but what was a surprise according to Merrill Lynch was the number of those in attendance suggesting equity raisings would be a way to reduce gearing in the sector.

As Macquarie points out equity levels are now an issue in the sector, as it estimates between $4-7 billion would need to be raised in the absence of any asset sales to bring gearing back to the lower end of stated target ranges. This is because, as Merrill Lynch notes, the strategies to date of selling assets, activating and sweetening dividend reinvestment plans and reducing distributions have largely been unsuccessful in dealing with equity needs.

The broker takes issue with the idea of equity issues by pointing out they would be dilutive to both earnings and asset values as well as largely rewarding the focus on rapid expansion via acquisition that caused the sector’s problems in the first place.

Merrills suggests if equity raisings were to be undertaken the most likely
companies to do so would be those with high gearing levels and assets
difficult to sell accretively, which in its book makes Rubicon Europe
Trust ((REU)), Babcock & Brown Japan Property Trust ((BJT)),
Centro Retail ((CER)), APN UKA European Retail Property Group ((AEZ)),
Macquarie DDR ((MDT)) and Macquarie Countrywide ((MCW)) the prime
contenders.

Among these the broker has Sell ratings on Rubicon, Macquarie DDR and
Macquarie Countrywide, while it rates AEZ as Neutral.

Macquarie adds to that list Centro Properties ((CNP)), GPT Group ((GPT)), ING Industrial ((IIF)), Orchard Industrial Property Fund ((OIF)) and Australand Property Group ((ALZ)), out of which it rates CNP, CER, MDT, GPT as Underperform and MCW, IIF and OIF as Neutral.

If these companies did look to raise additional equity the broker suggests the more liquid plays in the sector such as Westfield ((WDC)), Stockland ((SGP)), Goodman Group ((GMG)), Dexus Property Group ((DXS)), CFS Retail ((CFX)), all of which it rates as Neutral except GMG at Outperform and CFX at Underperform, and GPT itself could see some selling pressure if investors were forced to find a way to raise funds to take up any equity being offered elsewhere.

Taking an overall view of the sector Merrill Lynch suggests while the current discounts to net asset value and net tangible assets at which some stocks are trading are unlikely to be sustained, sector underperformance remains likely given the combination of rising cap rates, high gearing levels and payout ratios greater than 100% of trust earnings. As well, high debt and equity costs are seen as likely to offset strong domestic rental growth.

Such an outlook brings stock picking back into play, with GSJB Were suggesting a switch from ING Office Trust ((IOF)) to Macquarie Office Trust ((MOF)) given the latter offers a more attractive relative valuation thanks to it trading at a 27.4% discount to valuation against only an 18.1% discount for IOF. As well the broker points out the yield on the Macquarie vehicle is around 3.2% higher at present, this despite it presenting a better growth profile than the ING offering.

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