Listed property trusts are worthy of investment consideration despite their recent chequered history, according to sharemarket analyst Richard Batt.

The sector is recovering from a global financial crisis that tore down property trusts in response to plunging asset values and mounting debt. Since then, most trusts have scaled back funds management and stgelopment activities, while discount capital raisings led to improving balance sheets as average gearing levels fell. 

Batt, of Shadforth Financial Group, says most trusts are now trading below property values inside their portfolio. “This could lead to consolidation within the sector as the bigger and better positioned players take the opportunity to acquire their more vulnerable peers,” he says.

Any improvement in Australia’s economy should flow to Commonwealth Property Office Fund in line with stronger demand for office space.  It invests solely in Australian office properties, and Batt says the fund offers a high quality portfolio of buildings in capital cities, with the Commonwealth Bank being its largest tenant.

The fund’s gross assets have increased by $100 million to $3.1 billion in the six months to June 30, 2010, and net tangible asset backing of $1.13 a share is higher than its share price close of 95 cents on August 18. Batt says gearing of 23.5 per cent is conservative and the full-year distribution is 5.55 cents. On August 17, Commonwealth Property Office Fund reported a net profit of $114.2 million for the 12 months to June 30, 2010. “This stock is ideal for income portfolios,” Batt says.     

What Batt likes about Bunnings Warehouse Property Trust is low gearing of 18.8 per cent, enabling a healthy balance sheet to fund growth via property acquisitions and improvements to existing buildings inside its portfolio. Reliable income is generated from long term leases to the Bunnings hardware chain and other Wesfarmers subsidiaries, and rents, while growing in line with inflation each year, are reviewed every five years.

Batt says long-term leases, typically between 10 and 15 years, provides income security, perhaps reflecting a 4.4 per cent rise in the full-year 2010 distribution to 12.08 cents. The trust’s net tangible asset backing grew from a $1.79 a share in 2009 to $1.88 at June 30, 2010.

Analysts repeatedly say that management quality should be carefully examined before buying shares. Management can be the difference between success and failure in challenging times. Westfield Group is often noted for its strong management stretching back a long time. Batt isn’t the first to be impressed by Westfield management and its “strong track record”. Westfield Group offers a global portfolio of shopping centres in Australia, the US, UK and New Zealand.

Batt says: “The portfolio is well positioned in the current economic climate with high occupancy levels and long-term leases generating stable cash flows.” Westfield is committed to billions of dollars of stgelopment projects across the world that Batt says should reward investors over the long term. On August 18, 2010, Westfield Group posted a net profit of $961 million for the six months to June 30, 2010.

Stockland, the second largest trust on the ASX behind Westfield, has a diversified portfolio of retail, commercial and industrial properties. But Batt says the company’s residential stgelopment pipeline and retirement business portfolio are the major drivers of growth. According to Stockland guidance, earnings per unit are expected to grow by 7 per cent to 31 cents in 2011.

“The issue facing Stockland is there needs to be a sustained improvement in the housing market for the residential stgelopment and retirement businesses to generate more growth,” Batt says. “If there’s no improvement in the global economy and higher interest rates slow Australian growth, then stgelopment and investment earnings could be impacted.”  Gearing at 18 per cent translates to Stockland offering a strong balance sheet compared to its peers. A strong management team provides confidence to investors.

Potentially higher interest rates are a risk that should be factored in before buying property trusts. Batt says higher interest rates can stall construction projects, resulting in costly over-runs and diminishing margins. Higher interest rates can slow residential sales and put downward pressure on prices. But Batt believes the positives emerging in the listed property trust sector outweigh the risks in a global economy showing signs of rebounding – albeit slowly. 

“Although there are risks, the sector is once again taking on some of the defensive characteristics that once made it attractive to investors,” Batt says. “Asset values should appreciate closer to their net tangible asset backing as confidence grows, amid merger and acquisition activity gaining momentum. Distributions per security should increase over time as earnings improve in line with an increase in asset values and rental yields.”

Integrated real estate group Mirvac recently added Westpac Office Trust to its portfolio of retail, commercial, industrial, hotel and car park properties. The trust is also involved in residential stgelopment and operates a property funds management division. Net tangible asset backing is $1.60 a share, while the company’s share price closed at $1.335 on August 18.

Batt says: “The key for Mirvac Group going forward will be to focus on improving the quality of its asset base by selling non-core assets to reduce gearing post the Westpac Office Trust takeover.”        

The total value of Abacus Property Group’s portfolio was $851 million at June 30, 2010, according to Batt. It holds commercial, industrial and retail properties and is actively involved in funds management.  Batt says gearing at 23 per cent in June 2010 is manageable amid stable asset valuations. He says value exists as its share price close of 40.5 cents on August 18 is below net tangible asset backing of 60 cents a share. “The key to growth relies on management’s ability to source appropriate assets, reposition them to increase value and then sell them for a profit,” he says.  

Company  ASX Code  Share Price Close August 20, 2010
Commonwealth Property Office Fund  CPA  $0.95
Bunnings Warehouse Property Trust  BWP $1.88
Westfield Group   WDC  $12.53
Stockland  SGP $3.92
Mirvac Group  MGR  $1.34
Abacus Property Group  ABP $0.42


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