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In last week’s Sector Scan column on TheBull PREMIUM, analyst Steven Hing of Zodiac Securities pointed to the beaten down Australian Real Investment Trust sector as a good place to look for value shares with growth potential.  He provided an overview of five shares and his most positive pick was Cedar Woods Properties (CWP).

Hing isn’t alone in backing Cedar Woods Properties – RBS Morgans, Euroz Securities and Patersons also have buys on the company. You can read their research reports here:

RBS Morgans – Cedar Woods Properties: Laying the FY12 Foundation, 12th April 2011

Patersons – Cedar Woods Properties refutes takeover offer, 23rd March 2011

Euroz Securities – Cedar Woods Properties, 4th May 2011

REITS fell off the investing radar when the sector collapsed at the onset of the GFC (Great Financial Crisis.) Some newer retail investors may be unaware of the investing benefits they offer.

Prior to the GFC, real estate values had been appreciating handsomely since the end of the Second World War.  However, for the retail investor, property investing suffered from a serious drawback – illiquidity.  Simply put, if you had substantial investment capital tied up in real estate and you needed quick access to some cash, it could be quite some time before you could convert the investment.  REITS, or more appropriately AREITS (Australian Real Estate Investment Trusts) first appeared in the Australian share market in the 1970s but back then, they were called LPTs (Listed Property Trusts.)

Beyond the liquidity advantage, the tax designation of a REIT benefits both the owners and the investors.  Owners get significant tax reductions but are required to distribute 90% of their taxable income to shareholders.  Obviously, this makes REITs attractive investment vehicles for investors looking for dividend paying shares.

With that brief historical diversion out of the way, let us consider the question of whether or not we should share Steven Hing’s positive outlook for CWP.

To begin answering that question we will start with a “by the numbers” look at Cedar Woods Properties.  In the investing lexicon, looking at the numbers is known as quantitative analysis.

As you know numbers in isolation are not as meaningful as numbers in comparison.  Finding meaningful comparisons for shares can be difficult at best.  For some industries, the challenge is even greater, which is the case with AREITS.

First, they are part of the Financial Sector on the ASX, which includes banks and other investment companies not as heavily involved in real estate.

Second, there are several different kinds of AREITS.  Some are strict property trusts while others add fund management operations in different businesses.  What’s more, property trusts differ on the kinds of property they own.  Although it has commercial and retail properties, CWP is primarily known for its residential property stgelopment and ownership.

For comparison purposes, we are going to use Australand Property Group (ALZ), which is a much larger company, but does include substantial residential real estate holdings.  The market capitalisation of CWP is 269.48million, compared to 1.67billion for ALZ.

To begin, we are going to look at the performance measure that most experts agree left the AREIT industry dangerously vulnerable to the GFC – leverage.

Leverage (Gearing Ratios)

The Debt to Equity Ratio, also called the Gearing Ratio, measures how much a company is financed by creditors versus owners.  The higher the ratio, the riskier the company.  Since some industries typically see higher gearing ratios than others do, a comparison with a peer company is needed.  Here is how CWP and ALZ measure up on this ratio.

Gearing Ratio 36.5 68.97


Although larger companies can handle greater leverage, there is no denying that CWP appears to be a safer investment.  However, this comparison is a good example of a downside of quantitative analysis.

Before the GFC, gearing was not a major concern within the industry.  As long as the value of the underlying real estate assets kept appreciating, who cared how much we were borrowing to finance asset purchases?

Back then had you compared gearing ratios within the industry, the approaching danger would not have been apparent.  In reality, it was hidden, behind the numbers.  Since the overwhelming numbers of companies in the industry were high on this measure, everything seemed all right.  The GFC proved that “Fifty million Frenchmen can be wrong!”

Profitability Ratios

Two of the most widely used measures of profitability are Return on Equity and Return on Assets.  ROE shows the relationship between net income and shareholder equity while ROA measures net income over total assets.  Here are the numbers:

ROE (Return on Equity)  15.8 6.3
ROA (Return on Assets)    18 5.35




On both measures, Cedar Woods Properties is clearly the better buy.  Most financial experts feel an ROE above 15% and an ROA above 5% represents a good investment.

Market Valuation Ratios

The table below shows two of the most popular measures of what the market is willing to pay for shares relative to their past and projected earnings.  On both measures, it appears CWP may be slightly undervalued.  The PEG ratio is well under the fair value point of 1.0, making CWP a potentially attractive growth prospect.

P/E (Price to Earnings) 9.73 12.77
PEG (Price to Earnings Growth)    .29  1.51




Dividends are a major reason for investing in the AREIT shares so we want to look at both current dividend yields and stability.  The Dividend Yield measure shows how much cash you are getting back for each dollar invested.  The Payout Ratio shows the percentage amount of the company’s taxable earnings paid out in dividends.  Here are the numbers:

Dividend Yield 3.8 6.2
Payout Ratio  45 93




One would expect high Payout Ratios with AREITS and that is what you see with ALZ.  Payout Ratios over 100% are warning signs such high payouts are not likely to continue in the future.  CWP’s lower payout ratio might explain its below average yield.  These values indicate the need to look behind the numbers for an explanation.

Year over Year (YOY) Performance

As we said earlier, finding an “apples to apples” comparison for a company like Cedar Woods Properties is difficult.  In situations like these, the best comparison to use is often to compare the company against itself over time.  

We are going to look at some key measures of performance, including Net Profit after Taxes, Earnings per Share, Dividends per Share, Gearing, and Return on Assets and Equity, from year-end 2009 to year-end 2010.  Here are the numbers:

Cedar Woods Properties 2010 2009
NPAT (Net Profit After Taxes) 17.2$m 9.3$m
EPS (Earnings Per Share)  29 16.2
DPS (Dividends Per Share)  13 7
D/E (Debt to Equity or Gearing)   36.5 51.4
ROE (Return on Equity)  15.8 9.9
ROA (Return on Assets) 18 11.7








More than any numbers we have looked at so far, this table illustrates why Steven Hing sees a very positive future for CWP. 

•    Net profit after taxes increased 86% from 2009 to 2010.
•    Earnings per share increased 79% from 2009 to 2010.
•    Dividends per share increased 86% year over year.
•    Gearing decreased 15% year over year.
•    Return on Equity increased 60% from 2009 to 2010.
•    Return on Assets increased 54% from 2009 to 2010.

Looking at CWP from a “bottoms up” by the numbers viewpoint, it looks like a good investment.  However, what about from the “top down?”  If macroeconomic conditions drove the AREITS into disfavor, might it happen again?  For that kind of analysis, we need to look behind the numbers.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.