##{"id":59947,"date":"2012-05-16T10:04:38","date_gmt":"2012-05-16T00:04:38","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/05\/16\/buybacks-enhance-reit-potential\/"},"modified":"2012-05-16T10:04:38","modified_gmt":"2012-05-16T00:04:38","slug":"buybacks-enhance-reit-potential","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/05\/16\/buybacks-enhance-reit-potential\/","title":{"rendered":"Buybacks Enhance REIT Potential"},"content":{"rendered":"

\n\t – Australian REITs<\/span> outperformed in April
\n\t – Sector approaching fair value but lower interest rates supportive<\/strong>
\n\t – Capital management a focus in the sector
\n\t – Brokers update some sector preferences<\/strong><\/p>\n

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

\n\tAustralian REITs<\/span> (real estate investment trusts) performed well in April, gaining 5.5% and outperforming the 1.4% total return increase in the broader market. The outperformance<\/span> reversed the 191 basis point underperformance<\/span> the sector recorded in March and takes sector outperformance<\/span> to 11.4% over the past 12 months.<\/p>\n

\n\tThe solid results achieved in April mean A-REITs<\/span> have continued to close the gap to net tangible asset value (NTA<\/span>), JP Morgan estimating the gap as at the end of April was a discount of about 1.3%. Despite this, the broker notes there continue to be some valuation anomalies, as Westfield Retail ((WRT<\/span>)), Stockland<\/span> ((SGP<\/span>)), Mirvac<\/span> ((MGR<\/span>)), Centro Retail ((CRF<\/span>)) and Australand<\/span> Property ((ALZ<\/span>)) are trading at average discounts to NTA<\/span> of 19%.<\/p>\n

\n\tDespite the outperformance<\/span> the A-REITs<\/span> remain attractive in the view of BA Merrill Lynch, as the sector offers an average dividend yield of 6.0%, which is attractive relative to the current 10-year bond yield. <\/p>\n

\n\tMacquarie estimates the sector yield spread relative to bond yields is now 287 basis points, which compares favourably<\/span> to an average spread over the past 10 years of 176 basis points. In Macquarie's view while the A-REIT sector is now approaching fair value the combination of a high level of earnings certainty, attractive yields relative to bonds and solid capital positions is likely to translate to maintained or increased exposure to the sector among investors that expect long-term interest rates will stay low for some time.<\/p>\n

\n\tBA-ML shares this view, noting while recent share price gains across the sector have reduced the sector's attractiveness, with interest rates trending down stocks in the sector are likely to see further support notwithstanding current fundamentals.<\/p>\n

\n\tMacquarie has extended its analysis to factor in the impact of lower risk free rates, noting its models for the sector currently assume a risk-free rate of 5.5% against a current 10-year bond rate of about 3.4%.<\/p>\n

\n\tAs examples, Macquarie estimates if the risk-free rate was reduced to 4.5% its valuation of Westfield Group would increase to $11.01 from $9.02, all else being held constant. For Westfield Retail the increase in valuation would be to $4.05 from $3.35.<\/p>\n

\n\tDuring April the A-REITs<\/span> continued to focus on capital management, BA-ML noting Westfield Group ((WDC<\/span>)), Dexus<\/span> ((DXS<\/span>)) and Centro Retail all announcing asset sales programs, while Dexus<\/span> has also started an on-market buyback. This brings to eight the number of A-REITs<\/span> either undertaking or having recently completed buybacks<\/span>.<\/p>\n

\n\tDespite the buyback activity BA-ML estimates the sector ex Westfield Group and Goodman Group ((GMG<\/span>)) continues to trade at a discount to net tangible assets. This suggests to the broker capital management will remain a focus for the sector.<\/p>\n

\n\tUBS agrees, noting since August of last year A-REITs<\/span> have bought back $1.13 billion in stock, which equates to around 1.7% of total market capitalisation<\/span>. Given a total value of such buybacks<\/span> of around $4.36 billion has been announced, this process appears to be only around one-quarter complete.<\/p>\n

\n\tThe buybacks<\/span> are making sense, as JP Morgan notes operational buybacks<\/span> have seen $1.1 billion of stock repurchased at an average discount to last reported NTA<\/span> of 14%. This is equivalent to paying $1.0 billion for $1.2 billion of book value, the discount implying NTA<\/span> accretion of 0.7%. <\/p>\n

\n\tThe average price paid on UBS's numbers has been a discount to NTA<\/span> of about 12% and the broker notes all stocks with active of recently completed buybacks<\/span> have exhibited positive total returns from the time of announcement of the program to now. Most of the buyback stocks have outperformed relative to the sector.<\/p>\n

\n\tAt the same time BA-ML notes asset acquisitions are now accretive for a number of A-REITs<\/span> as the cost of capital has fallen in recent months. On BA-ML's numbers, asset acquisitions at cap rates in line with weighted averages and funded 70% equity and 30% debt wold be earnings accretive for BWP<\/span> Trust ((BWP<\/span>)), Investa<\/span> Office ((IOF<\/span>)), Westfield Group, Commonwealth Property Office ((CPA)) and Goodman Group ((GMG<\/span>)). <\/p>\n

\n\tWith respect to quarterly updates across the sector, BA-ML notes March quarter management commentary from a number of A-REITs<\/span> indicated market conditions remain challenging. This is the case across most markets, as developers indicated buyer confidence remains subdued while for office managers Melbourne appears the most difficult market given significant supply coming online.<\/p>\n

\n\tA number of the quarterly updates indicated earnings remain on track relative to previous guidance, even though as JP Morgan notes commentary indicated the March quarter was tough for new retail leases in particular. Office portfolio occupancy has continued to creep higher.<\/p>\n

\n\tGiven the pressures on new retail leases, JP Morgan continues to see better relative value in Westfield Retail, Stockland<\/span>, Mirvac<\/span> and Investa<\/span>, all of which are rated as Overweight, than in the Hold rated GPT<\/span> ((GPT<\/span>)) and CFS<\/span> Retail Property ((CFX<\/span>)) and Charter Hall Retail ((CQR<\/span>)), which is rated as Underweight.<\/p>\n

\n\tAs part of a recent tour of residential and commercial assets in Perth, JP Morgan notes population and wage growth in Western Australia are running at nearly double the national averages, while unemployment in the state is below that of east coast states.<\/p>\n

\n\tIn JP Morgan's view the Perth residential market is stabilising<\/span> after peaking in 2007, as recent data suggests residential rents are again growing solidly as vacancies have fallen below 2.0% and there has been a reduction in the overhang of established product.<\/p>\n

\n\tThe office market is also showing strong rental growth as vacancies here are also low at 2.0% as at March 31. This low level of vacancies may trigger another redevelopment cycle, but with high construction costs at present new developments are likely to require a sizable pre-commitment in JP Morgan's view.<\/p>\n

\n\tIn the retail market redevelopments<\/span> are being pushed out due to planning difficulties, while changes in trading hours restrictions are coming and are likely to offer some benefits according to JP Morgan.<\/p>\n

\n\tThis positive state of the WA economy supports JP Morgan's preference for exposure to company's with operations in the state, though the broker notes such exposure via A-REITs<\/span> is more difficult to access. Those companies weighted to the WA economy are Aspen Group ((APZ<\/span>)), Peet<\/span> & Company ((PPC)), Centro Retail and BWP<\/span> Trust. Others offering reasonable exposure include Westfield Retail, Stockland<\/span>, Australand<\/span> Property and Mirvac<\/span>.<\/p>\n

\n\tAmong the A-REITs<\/span> under its coverage, BA-ML has Buy ratings on Dexus<\/span>, Mirvac<\/span>, Westfield Group, Astro<\/span> Japan Property Trust ((AJA<\/span>)), Challenger Diversified Property ((CDI)), Centro Retail, Charter Hall Group ((CHC<\/span>)), Cromwell Property Group ((CMW<\/span>)), FKP<\/span> Property Group ((FKP<\/span>)) and Investa<\/span>.<\/p>\n

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\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":"