All is well in the global investing world, isn’t it? Uncertainty over the impact of the election of US President Donald Trump faded away in the early morning hours of the US election and global markets have been on fire ever since.
The US DJIA (Dow Jones Industrial Average) is arguably the most watched stock market index on the planet. Since the election of Donald Trump in November of 2016, the DJIA has set and eclipsed new record closing highs an astonishing 69 times. The booming bull market is not restricted to the US. The following chart from global asset manager BNP Paribas shows the performance of two indices of global stocks – the MSCI (Morgan Stanley Capital International) MXWO (index of developed global stocks) and the MXEF (index of emerging market stocks) since the US election.
Note the drop preceding the election as it became clear in the US Trump could win. Apparently, the investment community became enamored with the Trump promises of lower taxes, infrastructure investment, lower regulations, renegotiation of trade deals, and a resultant overall improvement in the US economy.
Investors appear to remain confident, given the historical lows of the US CBOE (Chicago Board Options Exchange) Volatility Index, known as the VIX. The VIX uses the prices of options to measure market expectations. The following chart from the US CNBC website tracks the performance of the VIX year over year.
Some call the VIX the “fear index” and this chart shows investors quickly forgot their fears of a Trump election. The VIX has risen from the all-time lows hit in July but there are still many market experts of the opinion the incredible nine-year bull market can continue.
Others, however, have their doubts as a growing number are urging caution. For the ASX, no less an authority than the technical experts at US investment bank Goldman Sachs are telling us the charts warn the ASX could be due for a 20% drop.
In the US, Fox Business News is reporting a survey conducted by the Gallup Organisation for Wells Fargo Advisors where 54% of investors respondents believe a market correction is on the way. Surprisingly, the survey found only 40% state they are adjusting their holders in anticipation.
If you already have enrolled in the ASX “Nervous Nellies” club, or are considering it, you have options. Conventional wisdom has always claimed there are “safe” stocks in tough times, among them A-REITS (Australian Real Estate Investment Trusts). However, conventional wisdom can fall by the wayside in recessionary times that impact rentals for A-REITS focusing on commercial property.
There are specialty A-REITS that focus on specific market “niches”, such as properties in the education, health care, aged care, and agriculture market. These sectors not only have strong long-term tail winds behind them, they are for the most part, recession proof. In good times and in bad, people still need to store physical possessions; visit physicians and seek medical treatment; look for alternative living arrangements as old age sets in; and get an education, more often than not at a very early age.
The ASX has opportunities with A-REITS in each of these niche markets, and one other niche that rarely makes the many lists of stocks to buy from investment experts – pub crawling.
BDO Australia – an accounting and advisory firm – publishes a yearly survey on the A-REIT Sector, reviewing both the overall performance of the sector and highlighting the top ten performers. For the financial year 2016, the ASX 200 A-REIT index posted a 24.6% return, improving on the strong performance in 2015 of a 20.2% total return and an 11% total return in 2014. In BDO’s opinion, the A-REIT sector “will continue to be a winning one going forward.”
Of the Top Ten performers, four were niche A-REITS. The following table lists performance metrics of the three still trading on the ASX, and a fourth that has been acquired.
In business since 2003, Ale Property Group (LEP) owns 86 “freehold” pubs across mainland Australia which the company leases to Australian Leisure and Hospitality Group, a joint venture between Woolworths (75%) and the Bruce Matheson Group (25%). A freehold pub is one with no ties to a specific brewery, enabling the pub to look for the best price on its wares. Ale Property has a solid track record of average annual rate of total shareholder return (dividends plus stock price appreciation) that remained intact despite the GFC, returning 11.5% over ten years. The company also has shown solid historical earnings growth, with 15.8% over five years and an admirable 13.8% over ten years.
Ale Property Group ranked first in the 2015 BDO survey. Over the last five years the company has outperformed the ASX XPJ A-REIT index by a wide margin.
Rural Funds Group (RFF) is a relative newcomer to the ASX, listing in February of 2014. The company owns a variety of agricultural properties it leases to qualified agricultural operators with experience in the sector. Agriculture can be a volatile sector, but Rural Funds Group properties are diversified across a variety of products, from almonds and macadamia nuts, to poultry, to vineyards, to cotton, and to cattle. The company has bold plans to expand its cattle holdings, contracting to acquire three cattle properties in northern Queensland, as of 24 October. In total, the Rural Funds Group currently owns 35 properties across New South Wales, Victoria, and South Australia.
Note that despite the volatility of the agricultural sector, Rural Funds Group has a Beta under 1.0, an indication the stock is less volatile than the market. In its first full year of operation on the ASX the company reported rental income of $21.7 million, which has risen to $41.5 million in FY 2017 – a 91% increase. Profit growth is equally impressive, more than quadrupling from $10.2 million in FY 2015 to $43.3 million in FY 2017, an increase of 325%.
Like Ale Property Group, the Rural Funds Group has outperformed the XPJ index substantially since it began trading on the ASX.
Arena REIT (ARF) currently owns properties in early education/childcare and healthcare, with an investment strategy targeting properties in secondary and tertiary education and government facilities. The driving factor is long term leases with high quality tenants. Right now, Arena owns 198 early learning centers and seven healthcare facilities, with an impressive list of tenants including G8 Education (GEM), Goodstart Early Learning, Affinity Education, and Primary Healthcare (PRY).
A-REITS tend to have high gearing, due largely to property acquisition and maintenance costs, but at 37.4% for FY 2017, Arena’s gearing was the best of breed of these niche A-REITS. Ale Property’s net gearing came in at a hefty 78.8%.
The company’s FY 2017 financial results were solid, with a 16% increase in rental income coupled with a 33% rise in profit. Dividends were up 10%, rising from $0.109 per share to $0.12 per share. On 28 July Arena announced a major acquisition – nine early learning centres across Queensland, New South Wales, Victoria, South Australia, and Tasmania. The cost was $65 million with the company later completing a successful institutional placement raising $55 million. Generation Health Care (GHC) was trading at $0.93 per share in late October of 2012. By 17 July of 2017 the company vanished from the ASX, having been acquired by TSX (Toronto Stock Exchange) listed NorthWest Healthcare Properties Real Estate Investment Trust at a price of $2.30. Generation’s last financial report for the Half Year 2017 showed a 7% increase in revenue an exemplary 195% profit increase.
While on the ASX investors could have been impressed with the company’s well diversified properties in a variety of healthcare operations. In total, Generation, still in business, owns 16 properties including hospitals and medical centres, laboratories, residential aged care facilities, and medical office buildings. The following chart from Market Index Australia shows the final days of GHC stock.
There are two other niche A-REITS placing in the top 20 of the BDO list. Folkestone Education Trust (FET) ranked 16th. The company focuses primarily on early learning properties, with 388 properties across Australia and New Zealand. The company’s dividend yield is 5.1% and it has rewarded investors with total shareholder returns of 13.4% over ten years; 25.8% over five years; and 21.2% over three years.
National Storage REIT (NSR) ranked 15th. The company owns and operates approximately 100 self-storage centres across Australia and New Zealand. The company had a banner year in FY 2017, reporting a rental increase from $69.7 million to $105.8 million and a profit shift from a loss of $200k to a gain of $7.1 million.
Although these two A-REITS didn’t make the BDO Top Ten, both have turned in solid track records of share price appreciation over the past two plus years.
>> BACK TO THE NEWSLETTER: Click here to read other articles from this week’s newsletter