For the trading year 2014 the ASX posted a return of about 5%, assuming dividends paid were reinvested into purchasing additional stock.  As of 25 June 2015 the share price return remains just under 5% before calculating dividend distributions.  In sharp contrast the Australian Real Estate Investment Trust (AREIT) sector posted accumulated returns of 25.8% for 2014.  As of 25 June the share price return for the AREIT Sector Index (XPJ) is just under 20%, also without calculating dividend distributions.

Considering the myriad of headwinds facing the overall property sector, this is impressive to say the least.  As you know, all REITS are not created equal, with large players diversifying across residential, commercial, and industrial properties.  Home prices are wildly rising in parts of Australia, reinvigorating the debate over property bubbles.  Retailers have faced tough conditions and the collapse of the mining boom has contributed to commercial real estate vacancies.  

The sector saviors have surely been falling interest rates; the search for yield; and better management.  The A-REIT Sector appears to have learned a lesson from the GFC as gearing and payout ratios have dropped substantially.

In many ways investing in an A-REIT is the same as investing in any equity.  Diversification across real estate classes lowers risk but also lowers rewards as a lower performing class will drag down the returns from classes doing well.  If you can tolerate the risk, “pure plays” in hot sectors can deliver superior rewards.

Accounting and advisory firm BDO Australia publishes a yearly survey on the A-REIT Sector, reviewing overall performance and highlighting the top performing REITS.  The 2015 Survey tells us the majority – close to 50% – of Australian A-REITS are into residential property with about 35% diversified across real estate classes.  The remainder are near “pure play” industrial and office REITS and a smattering of specialty REITS focusing on niches in the real estate space.

The BDO report goes on to say that while niche REITS in Australia are a relatively recent phenomena, based on the results from niche REITS around the world, there is “clear evidence that such trusts often perform better than their traditional counterparts.”  

The following table lists seven specialty REITS on the ASX.  The intriguing aspect of these companies is they are investing in property classes supported by powerful long term trends – healthcare, early childhood education; senior retirement living, and data and physical storage.

The BDO Survey ranks the top 30 REITS on the ASX.  We have included the BDO rank in the table along with other measures relevant to evaluating REITS.  Here is the table.

Company

(CODE)

BDO  Rank

Market Cap

Share Price

52 Week % Change

Dividend Yield

Payout Ratio

Gearing

Asia Pacific

Data Centre Group

(AJD)

Not Ranked

$148m

$1.29

+23%

5.46%

106%

19%

Arena

(ARF)

13

$373m

$1.63

+40%

4.28%

44%

56%

Folkestone Education

(FET)

5

$539m

$2.20

+34%

4.95%

30%

46%

Generation Healthcare

(GHC)

2

$363m

$1.71

+31%

4.99%

73%

70%

Ingenia Stapled

(INA)

1

$383m

$0.43

-13%

2.09%

68%

68%

Australian Leisure (LEP)

4

$732m

$3.83

+30%

3.83%

104%

125%

National Storage

(NSR)

19

$555m

$1.66

+30%

3.45%

41%

62%

Asia Pacific Data Centre Group (AJD), a relative newcomer to the ASX, is the only REIT not ranked in BDO’s top 30.  Physical storage specialty REIT National Storage (NSR), another recent entry to the ASX ranked 19; healthcare and childcare property holder Arena REIT(ARF) ranked 13th; and four of the niche players in our table ranked in the top five in the BDO Survey.

These REITS are dwarfed by the 10.5 billion dollar market cap of arguably the most diversified REIT on the ASX – Stockland Group (SGP).  The largest REIT, Westfield Corp, comes in at close to $19 billion.  

The dividend yields of these small players, all unfranked, are solid and a check of dividend history shows they are stable.  Payout ratios were a factor in the past problems the sector experienced, but only two of the stocks have ratios over 100%.  Asia Pacific listed in late 2013 and a check of the historical performance of Australian Leisure & Entertainment (LEP) shows the company has had high payout ratios over the last three years yet dividend payments have remained stable, with a two year dividend growth forecast of 2.2%.  The earnings growth forecast for LEP is 24.9% over two years.

The first and last REITS in the table are storage providers.  Asia Pacific began trading in January 2013 at $0.61 per share with National Storage arriving later in the year, opening at $1.00.  While investors in both companies have done well, AJD has had a bit of a rocky ride while NSR has gone steadily upward.  Here is a price movement chart comparing the two.

APDC (Asia Pacific Data Centre) invests in buildings and land currently in use as data centres or that can be developed into operating centres.  Income comes from rental fees.  The growth in cloud computing and the exploding demand for data storage driven by mobile computing makes APDC a stock to watch.  The company’s three operating centres are in Melbourne, Perth, and Sydney, with the sole tenant being data centre operator Nextdc (NXT).  In a creative capital preservation strategy, Nextdc was instrumental in creating APDC to be the purchaser of NXT centres, which the company now leases back from APDC! Dividend distributions have risen from $0.0131 per share in APDC’s first quarter of operations to $0.023 in the June 2015 Quarter.

Urbanisation is a trend still in place and more people crowding into cities means less space to store things.  National Storage (NSR) operates about 80 storage centres with 30,000 business and residential customers.  Storage centres exist to accommodate things ranging from vehicles to wine to business records.  The company owns and manages the centres, providing ancillary services such as insurance, packaging, and vehicle and trailer rentals. National’s Half Year 2015 Results were outstanding with a 34% revenue increase and a 93% rise in profit.  In March 2015 the company completed a successful capital raise to institutional and professional investors to reduce its debt and to pursue further acquisitions.  The share price dropped following the raise but quickly recovered and resumed its upward trend.  Here is the chart.

Arena REIT (ARF) and Folkestone Education Trust (FET) both invest in child care centres.  Arena is more diversified as it describes itself as a “social infrastructure fund,” also investing in healthcare, education, and government tenant facilities.   Folkestone changed its name from Australian Education Trust (AEU) back in June 2014 and first listed on the ASX in 2003, with a first day closing price of $0.57.  Arena made its ASX debut in June 2013, closing at $0.91.

Folkestone focuses exclusively on early learning properties, with 27 tenants occupying 357 properties across Australia and New Zealand.  The company’s Half Year Results showed a 15.9% uptick in revenue along with a robust 144.8% jump in statutory profit.

Arena’s Half Year Results were solid as well, with a 70.6% profit increase and a 23.5% increase in revenue.  The company completed a capital raise to institutional investors to strengthen its balance sheet as well as for further acquisitions.  The following price movement chart compares FET and ARF over the past two years.

Generation Health Care (GHC) limits itself to healthcare properties.  GHC owns 13 properties in Victoria, Queensland and New South Wales, including hospitals, medical centres, and laboratories.  

GHC once operated under the ING umbrella as the ING Real Estate Healthcare Fund (IHF).  Despite the strong long term potential for the Healthcare Sector, the company has struggled since it began trading on the ASX back in May of 2006 with a listing price of $1.00 per share.  Here is a ten year chart for GHC.

The share price began to rise in 2011 when APN Property Group (APN) took control and renamed the trust Generation Health Care.  2014 was a good year for GHC.  Half Year Results were stellar, with a 149% profit increase following a 43% revenue rise.  More relevant for the future, the company had two capital raises totaling about $83 million dollars.  In addition, General Healthcare acquired three aged care properties.

Some long term trends never fade away.  Pub owner Australian Leisure and Entertainment Property Management (LEP) has benefited from a trend that began eons ago when someone, somewhere, figured out how to ferment grain into a consumable beverage.  LEP owns about 86 pubs located across Australia, leasing them out on a long term basis to an operating company with Woolworth’s as the majority owner.  

Analysts and investors alike have expressed concerns over the years about the downside of long-term leases but LEP’s performance since listing on the ASX with an opening price of $1.00 per share, falling to $0.40 at the close, has been solid.  The average annual rate of total shareholder return over three years was 27.4%; over five years it was 20.3%; and over ten years it was 17%.  The share price took a beating post GFC but has since recovered.  Here is a ten year price movement chart for LEP.

It is somewhat surprising that the top-ranked REIT in the BDO Survey, Ingenia Communities Group (INA) is the only stock in the table to see negative price movement year over year.  Adding to the surprise are the Half Year Financial Results reported in February.  Revenues increased 43% and underlying profit rose 85%.  However, factoring the cost of acquisitions in 2014 dropped the statutory profit to a loss of about $1 million.  

Ingenia owns and operates affordable senior living accommodations throughout Australia.  Ingenia was also spun out of the ING umbrella, commencing trading as INA on 4 June of 2012.  Within two days the company made the first of many acquisitions, accompanied by numerous capital raises.  The latest string of acquisitions, made in 2014, included five senior rental villages and 13 lifestyle parks at a cost of $117 million.  Ingenia now has 59 properties in three residence “styles” – Active Living Estates; Garden Villages, and Settler communities.  

It is possible investors have grown weary of the capital raises, with two in 2014 and two in 2012.  Another factor that may have soured investor appetite for INA was the withdrawal of Ingenia from acquisition talks with Aspen Parks Property Fund in 2014.  

Whatever the reason, Ingenia remains in a very attractive spot with a growing number of properties to accommodate baby boomers as they retire.   Ingenia retirement properties appear to be affordable and offer living arrangements to suit a variety of senior lifestyles.  While long-term shareholders were crushed with the collapse of the A-REIT Sector following the GFC, the share price has actually been rising since INA left ING Real Estate.  Here is a ten year price movement chart for INA, showing price action while it was still part of ING.

INA trades a little over 1 million shares a day (averaged over three months).  In contrast, Stockland trades close to 10 million.  Ingenia has a two year earnings growth forecast of 29.2% and a dividend growth forecast of 11.1%, the best of any of the niche REITS in our table.  Stockland’s two earnings growth forecast is 7.9% with a 0.5% increase forecasted for dividend payments.  The number three REIT in the BDO Survey was Charter Hall Group (CHC).  CHC is diversified across traditional real estate classes including commercial office space, retail properties, and industrial sites.  The two year earnings forecast for CHC is 8%.

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