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In December of 2012 the RBA cut Australia’s official cash rate to 3.0%, matching the GFC low of April 2009.  Economists at Westpac and Commonwealth banks claim a further rate cut may come in February of 2013.

Even should the cash rate remain the same, one thing is clear.  Those investors still looking for high yields in term deposits may want to look for better opportunities.  The ASX Real Estate Investment Trust (REIT) sector offers a starting point.  Dividend yield for the sector averages 5.9% and the XPJ Index of REITs is up close to 22% year over year, about twice the return of the ASX 200 XJO.

In essence, a REIT gives individual investors the opportunity to invest in real estate holdings without the attendant direct ownership and management problems.  Think of a classical REIT as a landlord, owning and managing property.  

In late 2012 Woolworths announced it would spin off 56 existing shopping centers along with 13 under construction where a Woolworth’s branded retailer is an anchor tenant into a Property Reit.  The new company is called Shopping Centres Australasia or SCA Property Group (SCP) and went public on the ASX in November of 2012.  Here is the share price performance to date:

 

The expectation is the company’s dividend for 2013 will be A$0.051 and for 2014 A$0.104.  That works out to an average annual yield of between 7 % and 8% depending of course on the share price.

That sounds like an attractive opportunity given the relative safety of shopping centres anchored by popular Woolworth’s branded stores.  However, analyst are already bearish on the stock, claiming the long leases and vacancy rates of smaller mall stores cast doubt on SCP’s growth potential.   Macquarie and JP Morgan initiated coverage of SCP with UNDERPERFORM and UNDERWEIGHT recommendations citing long term growth concerns since 60% of SCP’s current assets are Woolworth operations with long term leases.  

However, company management at SCA has announced its intention to focus on high yield returns from existing malls rather than through new developments.  The company has plans to apply for its own credit rating in late 2013 and will continue to acquire properties not only from Woolworths, but also from rival Wesfarmers.

To make a sound investing thesis for buying into SCA one needs to address the question of long term growth.  To do that, we looked for other property trusts with retail exposure with solid fundamental performance measures over a full ten year span.  Two of these companies are diversified across industrial, retail, commercial and residential property.  Here are the five REITs with some key one year valuation measures.   

Company

Code

Share Price

52 Wk Change

Dividend Yield

Payout Ratio

Gearing

P/E

P/B

CFS Retail Property

CFX

$2.01

+11%

6.6%

113%

37.6%

15.79

.97

Mirvac Group

MGR

$1.54

+24%

5.5%

78%

30.4%

14.43

.92

Charter Hall Retail

CQR

$3.17

+13%

7.2%

91%

78.4%

12.51

1.09

BWP Trust

BWP

$2.25

+18%

6.4%

109%

29.7%

16.31

1.21

Ale Property Trust

LEP

$2.29

+17%

7%

153%

143.9%

16.92

1.17

If you are unfamiliar with REITS, the payout ratio for CFS Retail Property Group (CFX) of 113% may trouble you.  Income investors know dividend sustainability over time is more important than current yield.  In most industries payout ratios over 50% would be troubling.  In Australia the current range of payout ratios for REITS  is 72% to over 100%, depending on how the REIT is structured and managed.  

If you are familiar with REITS you know the sector was crushed by the GFC largely due to the pre-GFC combination of high gearing and payout ratios well over 100% across the board.  The sector has recovered, as evidenced by the outperformance of the index.  

CFS Retail Property (CFX) is exclusively focused on retail shopping centres and outlets across Australia.  The trust holds 29 properties with over four thousand tenants.  How has this company performed over time?  Here are dividend payouts and yields along with payout ratios and gearing levels for the last ten years.

 

CFS Retail Property

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dividends per Share (in cents)

9.7

10.6

10.5.

11.1

11.6

12.0

12.5

12.5

12.7

13.1

Dividend Yield

7.3%

7.2%

6.3%

6.0%

5.4%

6.5%

7.6%

6.6%

7%

6.8%

Payout Ratio

105%

1095

100%

100%

100%

123%

103%

120%

110%

113%

Gearing

27.7%

38.7%

37.8%

41.8%

33.8%

36.9%

39.2%

44.3%

38.0%

37.5%

Note the consistency of the dividend as well as the relatively low gearing that accompanies the high payout ratios.  CFX was one of the few REITS to weather the GFC in fine fashion.  Shareholders have been rewarded with a ten year average total shareholder return (dividends plus stock price appreciation) of 11.1% with a stellar one year return of 25.5%.  To capture just how successful this company has been, let’s look at a ten year share price movement chart for CFX:

 

Mirvac Group (MGR) is diversified across retail, commercial and office, and industrial properties.  The company has two operating segments.  The Investment arm acquires, leases, and manages properties while the Development operation builds residential properties.  Mirvac’s share price has outperformed the REIT XPJ Index year over year.  Here is their one year price chart:

 

Mirvac’s dividend yield is slightly lower than the sector average of 5.9%.  The lower payout ratio is due to the capital intensive nature of its development business.  Although the company has rewarded its shareholders with a one year total return of 33.3%, the ten year performance of -2.2% may not be surprising due to the nature of its business, but nonetheless far less rewarding than CFS Property Retail.  Here is the ten year track record for Mirvac Group:

 

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Dividends per Share (in cents)

25.8

28.6

30

27.5

28.3

29.2

8.0

8.0

8.2

8.4

Dividend Yield

6.5%

7.5%

9.5%

7.1%

5.6%

11.1%

7.4%

6.6%

6.6%

6.6%

Payout Ratio

83%

88%

113%

95%

95%

98%

66%

86%

78%

78%

Gearing

60.4%

73.9%

69.9%

73.7%

62.6%

54%

43.2%

33.8%

48.9%

31.7%

Charter Hall Retail (CQR) is part of the Charter Hall Group (CHC) but trades independently on the ASX.  The company could be considered a niche player in that its assets are primarily neighbourhood and sub-regional shopping centres with grocery stores as anchors.  The company has 10% of its asset base in the US and Europe with the rest here in Australia and New Zealand.  

Charter Hall has recovered well over the last three years, rewarding its shareholders with a one year 21.6% total return and a three year average return of 16.9%  Over ten years, the number drops dramatically to only 1.4%.  Here is how the share price performed over the last ten years:

 

While the share price has suffered, the issue for income investors is more one of consistency and sustainability of dividends.  Despite a 60% drop in share price over ten years, Charter Hall’s dividends were enough to keep investors near the break-even point with a 1.4% return.  Here is the company’s 10 year track record on dividends, payout ratio, and gearing.

 

Charter Hall Retail

2003

2004

2005

2006

2007

2008

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