##{"id":58792,"date":"2011-09-06T10:22:08","date_gmt":"2011-09-06T00:22:08","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/06\/oz-reits-offer-upside-growth-and-buy-backs\/"},"modified":"2011-09-06T10:22:08","modified_gmt":"2011-09-06T00:22:08","slug":"oz-reits-offer-upside-growth-and-buy-backs","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/06\/oz-reits-offer-upside-growth-and-buy-backs\/","title":{"rendered":"Oz REIT’s Offer Upside, Growth And Buy Backs"},"content":{"rendered":"

\n\t– Australian REITs<\/span> outperformed broader market in August
\n\t– Sector earnings performance for FY11<\/span> generally met expectations
\n\t– Share buyback trend increasing, payout policies largely unchanged
\n\t– M&A activity expected to remain a sector thematic<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tWith equity markets again driven by uncertainty in August the Australian REIT sector returned to outperformance<\/span>, gaining 3.1% for the month. This compares with the 2% fall recorded by the broader Australian market.<\/p>\n

\n\tPerformance for the week ending September 2 was even better, BA Merrill Lynch noting the REIT sector rose by 4.9% for the period. At current levels the broker estimates the sector offers an average 18.3% implied total return, while ex-Westfield Group ((WDC<\/span>)) the sector trades at an average discount to price targets of 9.4%.<\/p>\n

\n\tReports by REITs<\/span> covered by BA-ML were in general slightly better than expected, coming in 0.3% above forecasts overall. Outlook commentary remained cautious however, with BA-ML responding by trimming forecasts for FY12<\/span> by around 0.5%. The changes primarily reflect some downgrades to assumptions for residential plays and for retail growth. <\/p>\n

\n\tPost sector profit results, BA-ML has moved to No Rating on Charter Hall Office ((CQO<\/span>)) given an indicative takeover proposal for the company, while Mirvac<\/span> ((MGR<\/span>)) remains the broker's top pick among Australian REITs<\/span> based on a potential total return for the year ahead of almost 20%. <\/p>\n

\n\tWestfield is the other top pick, while key Underperform<\/span> recommendations for BA-ML are Dexus<\/span> ((DXS<\/span>)) and Goodman Group ((GMG<\/span>)) given cash flow expectations for the former should weigh on valuation and the latter appears priced for perfection despite some execution risks.<\/p>\n

\n\tIn contrast, Goldman Sachs has downgraded Mirvac<\/span> to a Hold rating from Buy previously. This reflects the view a full recovery in the development division is now not expected prior to FY13<\/span> or more likely FY14<\/span>.<\/p>\n

\n\tThis suggests to Goldman Sachs while the stock offers value given a current discount to stated net tangible assets (NTA<\/span>) of 26%, outperformance<\/span> is unlikely given the long lead time to an earnings recovery. <\/p>\n

\n\tElsewhere in the sector Goldman Sachs has also downgraded both Investa<\/span> Office Fund ((IOF<\/span>)) and GPT<\/span> Group ((GPT<\/span>)) to Sell from Hold ratings. For Investa<\/span> a flat earnings outlook suggests the current discount to NTA<\/span> of 16% will remain in place for some time, while for GPT<\/span> Goldman Sachs sees the stock as not offering great value relative to peers given a FY13<\/span> earnings multiple of around 14 times.<\/p>\n

\n\tTaking a broader view of the Australian REIT sector, Deutsche Bank suggests earnings results for FY11<\/span> were generally in line with or slightly ahead of expectations. Earnings per share (EPS) were 0.7% ahead of Deutsche's forecasts overall.<\/p>\n

\n\tIn sector terms, Deutsche notes retail portfolios performed slightly better than had been forecast, while both performance and guidance from office REITs<\/span> was marginally disappointing. Post reporting season Deutsche makes few changes to forecasts for the REIT sector, meaning the expectation for average EPS growth for FY12<\/span> remains at 3.2%.<\/p>\n

\n\tBy comparison, Deutsche cut FY12<\/span> forecasts across the broader market by 1.7%, this driven by a 3% downgrade for Industrials in general. Earnings risk remains to the downside for the Industrial side of the market in Deutsche's view, in contrast to what appears to be a lower risk earnings outlook for Australian REITs<\/span>.<\/p>\n

\n\tOne factor emerging to support some Australian REITs<\/span> is the initiation of share buyback programs, with Deutsche noting the likes of Charter Hall Retail ((CQR<\/span>)), Challenger Diversified ((CDI)), GPT<\/span>, Investa<\/span> Office and Stockland<\/span> ((SGP<\/span>)) have all recently introduced share buybacks<\/span>.<\/p>\n

\n\tMore such schemes are expected, Deutsche noting Commonwealth Property Office ((CPA)), Mirvac<\/span> and Dexus<\/span> are among those to have flagged potential buybacks<\/span> pending asset sales and capital deployment applications. <\/p>\n

\n\tFor Mirvac<\/span> in particular Deutsche suggests a buyback would accelerate the potential for the stock to trade towards net asset value prior to a recovery in organic returns on equity. Deutsche rates Mirvac<\/span> as a Buy.<\/p>\n

\n\tDeutsche also ascribes Buy ratings to Westfield Group, Westfield Retail ((WRT<\/span>)), Stockland<\/span>, Goodman Group, Charter Hall Retail and Australand<\/span> ((ALZ<\/span>)), while Hold ratings are applied to CFS<\/span> Retail ((CFX<\/span>)), Commonwealth Property Office, Dexus<\/span>, Charter Hall Office, Investa<\/span> Office and Abacus Property ((ABP<\/span>)).<\/p>\n

\n\tJP Morgan's analysis suggests Australian REITs<\/span> experienced modest cap rate compression in FY11<\/span>, the third successive year of such an outcome. The compression has been modest at just three basis points for the six months to the end of June.<\/p>\n

\n\tIn August specifically JP Morgan notes major direct transactional activity was weak at $519 million, down from an average of $1.2 billion over the previous three months. The office sector dominated the transactions in the period, accounting for 77% of transactional value.<\/p>\n

\n\tLooking back 18 months, JP Morgan notes the lending picture for REITs<\/span> has improved significantly over the past 18 months, to the extent there are now minimal signs of balance sheet stress. On JP Morgan's numbers, Australian REIT majors are now geared to just 29% and interest cover for FY11<\/span> averaged 3.8 times.<\/p>\n

\n\tThis has freed up REITs<\/span> to undertake both capital management and to pursue new lending agreements, with REITs<\/span> under coverage by JP Morgan announcing $12.5 billion of new lending over the past 14 months. Debt exposure for the sector now stands at $40 billion, down from $76.5 billion in June of 2008.<\/p>\n

\n\tThis has seen the average term to maturity of debt for the sector lengthen to 4.0 years, meaning debt duration is no longer the risk it was. In JP Morgan's view, buybacks<\/span> have been introduced to help close the big discounts to asset backing. <\/p>\n

\n\tThe buybacks<\/span> have offset a lack of payout policy changes, JP Morgan noting he lack of changes in this regard makes some sense given the still uncertain economic environment in which the REITs<\/span> are operating at present. If market conditions improve there is upside risk to payout ratios according to JP Morgan.<\/p>\n

\n\tM&A activity is expected to remain a consistent theme in the sector in the view of JP Morgan, especially if the listed market continues to price REITs<\/span> at a greater than 20% discount to NTA<\/span>. This valuation discount means REITs<\/span> remain reluctant to raise equity, as JP Morgan expects FY11<\/span> may prove to be the lightest year for such raisings<\/span> by REITs<\/span> over the past 15 years.<\/p>\n

\n\tBA-ML has looked more closely at the global mall sector of the property market, finding the mall industries in Australia, Canada, Europe and the US are mature, Singapore is early mid-cycle, while Brazil and China are still emerging.<\/p>\n

\n\tIn terms of dedicated mall operators BA-ML sees Westfield Group as the most attractive given a relatively low price to net asset value, a solid dividend yield and a higher implied cap rate. According to BA-ML the quality of Westfield's assets, accretive redevelopments<\/span> and the contribution from new markets such as the recent entry into Brazil should continue to support long-term earnings growth.<\/p>\n

\n\tFrom an overall Asian perspective, BA-ML suggests the most favoured<\/span> exposures are developers in China and Japan and the Australian REIT sector in general. Chinese developers offer value at current levels, profitability is improving in the Japanese market and corporate M&A action and share buybacks<\/span> are emerging themes in the Australian sector. <\/p>\n

\n\tIn contrast, BA-ML remains underweight in both the Singapore and Hong Kong markets on valuation grounds as stocks in both markets appear fully priced at current levels. Mirvac<\/span> is the only Australian play among the broker's key stock picks for REITs<\/span> in the Asian region.<\/p>\n

\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"