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In December last year the RBA cut the official cash rate to 3.0%, matching the GFC low of April 2009.  Economists at Westpac and Commonwealth reckon a further rate cut could be on the cards next month. But even if the cash rate remains the same, one thing is clear – yield seekers may find better opportunities than cash and term deposits. 

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.

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

Dividend forecast for 2013 is A$0.051 and A$0.104 for 2014 – which is an average annual yield of between 7% and 8% depending, of course, on the share price.

Given the relative safety of shopping centres anchored by popular Woolworth’s branded stores, it’s surprising, however, that some analysts are bearish on the stock – arguing that long leases and vacancy rates of smaller mall stores cast doubt on SCP’s growth potential. Macquarie and JP Morgan initiated coverage on 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.  

Company management intends to focus on high-yield returns from existing malls rather than through new stgelopments.  The company also plans to apply for its own credit rating later this year and will continue to acquire properties not only from Woolworths, but from rival Wesfarmers.

To make a sound investing thesis for buying any REIT one needs to address the question of long-term growth.  With this in mind, we’ve surveyed the market for REITs with solid fundamentals over ten years.  Two of these companies are diversified across industrial, retail, commercial and residential property. 

Here are five REITs with some key one-year valuation measures.   

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.  

The REITS 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.  Below are dividend payouts and yields along with payout ratios and gearing levels for the last ten years.

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 – and 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, look at its ten year chart:

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 its one year 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 stgelopment business.  Although the company has rewarded shareholders with a one year total return of 33.3%, its 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:

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 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%.  Below is its ten-year chart:

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.

BWP Trust is another specialty focused REIT.  Although the investment focus is on commercial real estate, the assets are primarily warehousing facilities for large-goods retailers like Bunnings Hardware, a subsidiary of Wesfarmers.   

The narrow focus helps ensure low vacancy rates but makes the company more at risk to housing and construction downturns.  Despite this, BWP is one of the few Australian REITS that performed well during and after the GFC.  BWP shows total average annual shareholder returns of 13.3% over ten years; 11.2% over five years; 16.6% over three years, and 38.8% over one year.  Here is its 10 year chart:

Below is the company’s very solid history of dividend payouts and respectable gearing levels:

In 2003 the Fosters Group shed its company owned pubs into a property trust aptly named Ale Property Group (LEP).  All the properties owned by Ale Property are leased to a subsidiary of Woolworths, the Australian Leisure and Hospitality Group (ALH).  The initial leases were for 25 years with annual rent increases linked to the Consumer Price Index.  A rent review is scheduled for 2018.  This virtual guarantee of income means the company’s payout ratios and gearing levels are less of a concern to investors.  Although hit hard by the GFC, Ale Property Group is still up 150% over the nine years the stock has been trading on the ASX.  Here is the chart:

Below is the company’s nine-year track record of dividend payments: 

While the bearish analyst opinion about the newly trading SCA may prove correct, looking at the performance of Ale Property Trust, one has to wonder what analysts had to say when that company began trading.

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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.