Listed property or real estate investment trusts are back on the investment agenda, according to equities analyst Steven Hing, of Zodiac Securities. Hing says United States private equity firm Blackstone’s $207 million bid for Valad Property Group may spark more consolidation within the sector. Property trusts, such as Valad, were punished during the global financial crisis in response to plunging asset values and mounting debt. Hing says many were forced to recapitalise as gearing ratios exceeded the underlying asset values.

But the sector is continuing to recover, Hing says, and he has drawn up a list of value stocks he believes are worthy of consideration. The real estate investment trust category, part of the broader financials sector, consists of 64 companies, for a market capitalisation of about $114 billion. The financials sector contains more than 300 companies for a market capitalisation of about $515 billion.

The financials sector, according to Standard & Poor’s, has been a disappointing performer in the past year, posting a negative annualised price return of 6.47 per cent for the 12 months to April 30, 2011. It fared little better over five years, booking a negative annualised price return of 5.54 per cent. In comparison, the S&P/ASX200 did better, with a positive annualised price return of 0.33 per cent in the past 12 months to April 30 and a negative 1.71 per cent over five years.

Looking forward and beyond resources, Hing says there should be room for quality property trusts as part of a balanced portfolio.

Aspen Group (APZ)

Chart: Share price over the year to 13/05/2011 versus ASX200 (XJO) 

Market capitalisation: $270 million
Price/earnings: 35 times
Share price: 47 cents

Profit after tax for the 2011 first half was $7.7 million, down $5.3 million on the same half last year. Significant non-cash items, such as revaluation and fair value adjustments contributed to the fall. But $16.4 million in operating profit after tax for this diversified commercial property group was marginally up on last year. Hing says a 10.4 per cent increase in net rental income from the investment property portfolio, a 5 per cent contribution increase from the funds management business and an 8 per cent decrease in corporate overheads are positive signs. He says an increase in total operating revenue to $41.1 million is also encouraging. A recurring rental stream and an attractive dividend yield of about 9 per cent add weight to the long-term investment case.

Challenger Diversified Property Group (CDI)

Chart: Share price over the year to 13/05/2011 versus ASX200 (XJO)  

Market capitalisation: $498 million
Price/earnings: 7.8 times
Share price: 54 cents

Hing says the share price responded positively to the company buying a Melbourne office building earlier this year. The share price has risen from 48 cents to finish at 54.5 cents on May 11, 2011.  Challenger holds investment interests in 29 office, industrial and retail properties mostly in Australia, but also in France. Hing considers diversity a key strength as it spreads risk even though property is at its core. Hing says a stronger Australian economy should enable the company to improve on its first half results to December 31, 2010. Company operating profit was marginally up to $25.3 million as was net tangible assets to 67 cents a unit.    

Cedar Woods Properties (CWP)

 Chart: Share price over the year to 13/05/2011 versus ASX200 (XJO)

Market capitalisation: $278 million
Price earnings: 8.67 times
Share price: $4.45

Hing says its hard to argue with a company that delivers the goods. Cedar Woods recently rejected a $310 million takeover offer, claiming it undervalued the company. Cedar Woods has risen from a 12 month low of $2.14 to finish at $4.40 on May 11, 2011.  Involved in subdividing urban land and building in Perth and Victoria, Cedar Woods booked a record first half net profit after tax of $24.2 million. The interim dividend of 11 cents was up 120 per cent. It also significantly reduced its gearing to 16 per cent at December 31, 2010. Hing says full-year profit guidance has been upgraded from $24 million to $28 million. He says the company offers a bright outlook with pre-sales of $120 million in place for financial year 2012. “The share price has retreated from its 12-month high of $5.15, so there’s opportunity here if you share my outlook.”

BWP Trust (BWP)

Chart: Share price over the year to 13/05/2011 versus ASX200 (XJO)  

Market capitalisation: $897 million
Price/earnings: 6.9 times
Share price: $1.735

What Hing likes about BWP is it’s able to generate a reliable and steadily increasing income stream for unit holders from leasing most of its properties to the giant Bunnings Warehouse chain. Its portfolio value for the six months to December 31, 2010, was up by $53.2 million to $1.053 billion. Net tangible assets of a $1.96 a unit at December 31 is higher than its share price close of $1.735 on May 11, 2011. Hing says a 3.6 per cent increase in income to $40.4 million was mostly due to a growing property portfolio. Earlier this year, the Trust acquired 13 Bunnings Warehouse properties from Bunnings Group. Hing says he expects unit holders to benefit over the longer term from increasing income generated by a growing property portfolio.

Growthpoint Properties Australia (GOZ)

Chart: Share price over the year to 13/05/2011 versus ASX200 (XJO)  

Market capitalisation: $404 million
price/earnings: 6.72 times
Share price: $1.895

By its own admission, the philosophy of Growthpoint Properties Australia is to be a “pure landlord”. It doesn’t have a funds management business, nor does it intend to be one and it doesn’t operate a property stgelopment business. Rather it invests in prime business locations in Australia for rental income that grows over time. It’s also in the process of taking over the debt-laden Rabinov Property Trust. Hing says an uncomplicated business model works in this company’s favour as transparency attracts investors. Hing says the equation is relatively simple – quality properties offer capital growth over time and generate rising income along the way to grow dividend yield.

Market capitalisation and price/earnings ratios at May 10, 2011
Share prices at May 11, 2011

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