How to pick the best real estate stock plays

Browsing the 52 Week Low List can be a viable strategy for finding solid companies dragged down by general market slowdowns.  Two Real Estate stocks with outstanding track records made the list in early December.  Cedar Woods Properties Limited (CWP) fell to a 52 week low of $5.52 on 5 December while Finbar Group Limited (FRI) dropped to $1.24 on 8 December.  Both have already begun to move in the other direction, with CWP up more than 10% to $6.25 and FRI showing a modest increase to $1.28, as of 11 December.

The hottest sector on the ASX year over year is the XHJ Healthcare Index, up 25%.  Right behind the XHJ is the A-REIT XPJ Index, up 22%.  With no specific news of any kind to account for the fall of the two stocks in this sector, one can speculate the cause is the exposure of both companies to the Western Australian market where the economy has been rocked by the falling iron ore price.  Finbar operates exclusively in Western Australia while Cedar Woods has a presence in Victoria as well, which could explain the difference in share price recovery.  Nevertheless, both companies have seen impressive share price increases over a ten year period, which of course includes the GFC.  Here is a ten year price movement chart for CWP and FRI.

Cedar Woods has eight residential projects in Western Australia along with three in Victoria.  The company has commercial projects in Victoria as well as a mixed use commercial/residential development.  In October Cedar Woods announced it had received environmental approval for its Mangles Bay Marina tourism project in WA and more recently the company got planning approval for the Upper Kedron master planned community development in Queensland.  Full Year 2014 financial results for CWP showed a 24% increase in revenue and an 11% rise in profit.  The company pays a fully franked dividend with a current yield of 4.4%.  

Finbar Group develops residential apartment complexes and commercial properties primarily in the metropolitan Perth area.  The company’s business model is unique in the use of development through joint ventures in addition to projects developed directly by the company.  The joint venture model spreads risk and secures acquisition capital without the need for loans or share placements.  Finbar also outsources a variety of business functions from development to sales to construction.  In the last six months the company has announced the approval of five additional projects in Perth.

Full Year 2014 Financial results continued the positive profit growth of the last seven years with a 17% increase.  Finbar’s current dividend yield is a healthy 7.8%, fully franked.  Both CWP and FRI have produced double digit returns for shareholders over time.  The following table shows the enviable track record, along with current share price and year over year change.

The market caps of these two companies are dwarfed by Australia’s largest blue chip diversified property developers – Stockland Corporation (SGP) at $9.6 billion and Lend Lease Group (LLC) at $8.7 billion.   Finbar has a market cap of $288 million while Cedar Woods has a market cap of $465 million, yet the shareholders of these two mid-cap real estate developers have fared better than their counterparts with the bigger players.  The following table shows shareholder return averages over the last ten years for SGP and LLC.

While Stockland operates in residential, commercial, and industrial real estate in Australia, Lend Lease Group is more diversified.  LLC has exposure in the UK and the US and supplements traditional residential and commercial development with investment management and services as well as infrastructure development.   

Over ten years the share price of both Finbar and Cedar Woods rose more than 150%.  Investors who opted for those companies bet that the increased risk of owning shares in near pure play residential real estate developers would be outweighed by the rewards, and they won.  Compare the share price performance of those two against the diversified operators Stockland and Lend Lease.  Here is the chart.

Both Stockland and Lend Lease have respectable dividend yields, with Stockland currently at 5.8% and Lend Lease at 4%, but neither offer franking credits.  Note also that neither company has a stellar 2 year earnings forecast, with analysts actually expecting LLC to see a reduction in earnings per share from $1.50 in FY 2014 to $1.05 in 2015 and $1.04 in 2016.  Yet year over year, investors prefer SGP and LLC.  

The property market remains solid but there is one segment more than any other with a bright outlook, and that is retirement living accommodations.  Many Baby Boomers will be looking for different housing options in a long term trend that will last for decades.  Stockland made its first move to capitalize on this trend, acquiring its first Retirement Village in 2007.  The company now has around 8,000 living units in its Retirement Village Communities and is looking to add another 4,000.

As you might expect, the best growth plays here can be found in the pure-play retirement living developers.  Here are two stocks with solid track records of shareholder return and outstanding growth prospects.

These two companies have rewarded shareholders handsomely, grown earnings, and have spectacular forecasted growth.  Lifestyle Communities Limited (LIC) reported earnings per share (EPS) of 4.3 cents in FY2014, with growth to 11.4 cents per share forecasted for 2015 and 13.6 cents per share in 2016.  Ingenia Communities Group (INA) reported EPS of 1.7 cents in FY2014, with growth to 2.9 cents per share forecasted for 2015 and 4.2 cents per share in 2016.  

Lifestyle has a market cap of $203 million with operations only in Victoria.  The company specializes in affordable independent living communities for working, semi-retired and retired people.  The company had around 1600 sites at the close of 2013 and has acquired two more community locations this year.   In a Lifestyle Community the customer buys the home, but leases the property, thus lowering the price.  The leasing model provides recurring revenue and the company also benefits from a deferred management fee when a home is sold.  The company’s Full Year 2014 Financial results boasted 41-42% increase in revenues from home sales or settlements and a 76% increase in net profit after tax (NPAT).

Ingenia Communities Group has comparable numbers, although somewhat less impressive, but the stock price has remained relatively flat.  The company provides affordable housing through Manufactured Home Estates, which are built off-site and then transported to the community, and also through rental housing.  Ingenia has been buying up Caravan Parks and Trailer parks to grow its market.   The company went under a different name and code, ING Real Estate Community Living Group (ILF), until relisting on the ASX in its present form in 2012.  Shortly after listing Ingenia announced the first of what was to be many acquisitions, fueling investors’ hopes and lifting the share price.  Here is a five year price movement chart for INA.

Full Year 2014 results showed the acquisitions paying off as the company swung from a FY 2013 underlying profit loss of around $10 million to a profit of $11.6 million for a 97% increase.  However, investors may have grown weary of the capital raises and debt facilities to fund the acquisitions. The company’s gearing is at 120% as of the most recent quarter (MRQ) with $288 million in total debt, also MRQ.  The market cap for ING is $300 million.   The Current Ratio is 0.31.  

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