In a previous column on TheBull we highlighted the potential for solid performance from the beaten down Australian Real Estate Investment Trust Sector. With a properly managed REIT, the dividend payout is substantial and the opportunity for capital appreciation is there as well.
We looked at what caused the REITS to fall so far from grace during the GFC and introduced several REITS with substantial yields that currently feature at least one analyst Buy Recommendation.
From that list, we will now look at the two REITS with the best combination of high yield, sustainable payout ratios, and low gearing – SGP (Stockland Group) and CHC (Charter Hall Group.)
The Stockland Group Business Model
Stockland Corporation Limited operates in three broad areas:
1. Residential Living
2. Retirement Living
3. Commercial Properties
There is a fourth business unit operating in the UK market but SGP’s principal operations are here in Australia. Within each segment, they design, stgelop, and manage properties.
The Residential Living segment includes planned communities and residential apartments in high growth areas. In Fiscal Year 2011 the communities and apartment properties combined showed an operating profit of approximately 340 million dollars.
The Retirement Living segment is where the company expects substantial future growth, although operating profit in 2011 was only $29 million. However, in 2010, the figure was only 11 million dollars. The occupancy rate in this segment was 94%.
These two operating segments represent 37% of Stockland’s operating profit. The Commercial Properties segment accounts for 62% of the operating profit. The Retail properties had a 2011 operating profit of 286 million dollars with an occupancy rate of 99.5%.
The Office and Industrial properties portion of the segment combined for an operating profit of 260 million dollars. The occupancy rate in the Office group was 96% while Industrial properties had an amazing occupancy rate of 99.8%.
SGP´s operating profit is skewed towards the investment property portfolio, which is currently well diversified. The Commercial Property portfolio is well leased, having over 99.5% retail occupancy, 96% office occupancy and 99% industrial occupancy (30 June 2011).
The Charter Hall Group Business Model
Charter Hall Group has a different business model. It is complex and difficult to understand due to the tangled nature of the subsidiaries and the fact they have both direct investment and investment through managed funds.
They have three “heads” to their business model – property investment, funds management, and stgelopment management. Their operating area is restricted to Australia and New Zealand.
The three “heads” are structured into two operating segments – Property Investment, and Funds Management and Corporate.
The Property Investment segment has interests in investment properties and unlisted funds with holdings in a variety of sectors ranging from retail to commercial, to industrial, to residential.
The Funds Management and Corporate segment stgelops and manages investment opportunities for its institutional and retail investors through the managed fund structure. It also offers a range of related services, from property advice to financial structuring of acquisitions, and divestment strategies.
As is that were not enough, they also provide direct property management assistance from market analysis to environmental and engineering management.
Both CHC and SGP are diversified across real estate asset classes, although in different ways. On the surface, it appears that SGP has more exposure to the residential housing market, which as you know, is softening somewhat. However, the bulk of their profits come from the commercial space and retirement living, where occupancy rates during 2011 were high.
Now let us take a look at how market participants look at these two REITS.
Market Valuation Ratios
If you look at the Price to Book ratios for our two shares and the REIT sector as a whole, you can see market participants confirm what we discussed last week regarding the view of the analyst community towards the REIT sector. They are trading well below their asset value. The P/EG ratio for SGP may reflect concern over the future of residential property in Australia, but as the breakdown of profit by segment displayed, they are well positioned to withstand a drop.
Now let us look at actual share price movement within the past month. The following chart compares both SGP and CHC to the overall market.
Finally, here is a 2011 to 2010 comparison of selected performance numbers for both companies.
Year over Year Performance Comparison
|SPG 2011/2010||CHC 2011/2010|
|NPAT in $m (Net Profit After Taxes)||755/478||52.3/.2|
|EPS in cents (Earnings Per Share)||31.3/28.8||16.5/12.8|
|DPS in cents (Dividends per Share)||23.7/21.8||16.5/12.3|
Both companies showed increases in every performance category, with CHC coming in with a dramatic improvement in profit in 2011 versus 2010. In fact, CHC showed greater improvement in every measure listed.
Before calling your broker or logging on to your online trading account to invest in CHC, there is one final thing you should know.
As mentioned, CHC operates through subsidiaries, one of which – Charter Hall Office (CQO) – trades independently on the ASX. Earlier in the year while many investors were ignoring the potential of Australian REITS, some prominent Hedge Funds in the United States were not and stepped in with a bid to acquire CQO.
Although CQO fought off the bid, a group of pension funds and others, led by Macquarie Group have stepped in with yet another bid. Their plan is to take the company private.
CQO would be quite a prize as their recent earnings report was, to say the least, stellar. Operating earnings rose 69% year over year; revenues increased by 60.5%; and net profit after taxes increased by 86%.
As of this moment, there is no firm indication of how such a transaction would impact CHC. Their management claims they would still be entitled to management fees generated by CQO but there is nothing yet agreed to.
Considering this uncertainty, it might be prudent to wait until the matter is resolved. If you believe the current slowdown in the Australian housing market will not lead to a US style meltdown, SGP is also a solid choice.
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.