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A-REITS Snapshot – Where to Find Value Right Now
An Australian real estate investment trust (A-REIT) is a company that owns and (generally) operates a portfolio of income-producing real estate. A-REITS meet certain regulatory guidelines, are listed on the Australian stock exchange and acquire the majority of their earnings from rent.
Despite a significant uplift in real estate values since the GFC (The A-Reit Index [INDEXASX:XPJ] has surged by 189% since the GFC low on March 6, 2009), there are a few REITS which are trading at a discount to assessed net tangible asset value (NTA) per share.
The AFR notes, “The market value of the 18 companies in the ASX 200 A-REIT index has surged to $163.2 billion from $137.4 billion since January 1… The $25.8 billion, or 19 per cent gain, compares with a 16 per cent gain in the ASX 200 industrials index.” With the cash rate falling beyond record lows, there is increasing value in the high yield offered by the A-REIT index.
|Name||Symbol||Last Price ($)||NTA ($/Share)||Premium/ Discount to NAV (%)||Price Change Since 8 June 2018 Update (%)|
|Charter Hall Group||CHC||11.52||3.82||201.6||79.7|
|Charter Hall Long WALE||CLW||5.17||4.01||28.9||21.6|
|Charter Hall Education Trust||CQE||3.84||2.87||33.8||N/A|
|Shopping Centres Australasia||SCP||2.61||2.27||15.0||5.9|
Discounted REITS from June 2018 & How They Performed
In June 2018, three REITS were trading at discounts to NTA/share:
- Vicinity Centres
- Viva Energy
Of these REITS, Viva Energy has made a superb capital return of 32.4% while Scentre and Vicinity Centres continued to lag the index. And Viva Energy now trades at a strong premium to NTA/share.
Currently, three REITS in the ASX200 are trading at discounts:
- Vicinity Centres
These respectively yield 5.81%, 7.95% and 6.4%, all substantially greater than the RBA cash rate of 1.25%.
If a REIT is not trading at a premium to NTA, this indicates that the market places no value on the asset management business itself. At a discount to NTA, the market expects negative/underwhelming future earnings due to either internal or external factors. At the moment, most Australian REITS trade at a premium to NTA, indicating that investors expect strong asset management and earnings capacity across the industry.
Despite superb past performance for the entire index, there are always opportunities available to investors to take advantage of asset mispricing.
Our June 2018 Top Picks and How They Performed
|PICK||CAPITAL GROWTH (%)||DIVIDEND YIELD (%)||TOTAL RETURN SINCE LAST UPDATE (%)|
|GPT Group (GPT)||22.9||4.9||27|
|Charter Hall Long WALE Reit (CLW)||21.7||5.9||27.6|
|Dexus Property (DXS)||39.5||4.9||44.4|
An equally weighted portfolio of our last top picks would have returned 33% since 8 June 2018. Comparatively, the broader ASX200 has returned 12.7% (8.4% capital growth + 4.3% dividend yield) over the same period.
These REITS remain integral to a diversified property portfolio. However (excluding Charter Hall Long WALE), we believe there are better risk-reward opportunities in the current market.
Our Top Picks
Our current top three A-REIT picks are:
- Unibail-Rodamco-Westfield (URW)
- Charter Hall Long WALE Reit (CLW)
- BWP Trust (BWP)
Unibail-Rodamco-Westfield was formed through the merger between Unibail-Rodamco and Westfield in December 2017. The newly formed group is the premier global developer and operator of flagship shopping destinations (portfolio value €65.2B at December 30, 2018). The portfolio comprises: 87% retail, 6% offices, 5% convention & exhibition venues and 2% in services. There are 92 shopping centres (55 flagships) across Europe and North America.
The REIT offers diversification for Australian investors, particularly significant during the current period of uncertain domestic economic growth. URW’s centres are in prime locations with strong annual foot traffic over 1.2B people. The group has a development pipeline of €11.9B. Despite a relatively high LVR of 37%, URW has an incredibly low 1.6% average cost of debt. There are further potential currency benefits for Australian investors. With downwards pressure on the Australian Dollar as the RBA continues to loosen monetary policy, offshore earnings could become more lucrative.
URW trades at a 44% discount to NTA, and consequently offers a stellar 8.5%/annum dividend yield. A 10% depreciation of the AUD will result in a 10% higher AUD dividend yield (at current valuation, 9.35%/annum).
In summary, URW offers Australian investors access to a premier portfolio of high-yielding European and US centres at a steep discount to NTA, with potential added yield benefits from a weaker Australian Dollar.
Charter Hall Long WALE Reit (CLW)
Charter Hall Long WALE Reit (CLW) has further cemented its place in the A-Reit index as a bastion of stability. Despite its 27.6% total return since June 2018, we continue to see value in the REIT for two key reasons:
- Continued uncertainty in the domestic economy. Ex-Governor of the RBA, Glenn Stevens, acknowledged that the 25 basis points recently cut from the RBA’s cash rate had very minimal impact on key economic indicators. A recent AFR opinion article analysed expansionary monetary policy during previous cyclical downturns and found that the RBA required an average 3.1% rate cut to avoid recession. The RBA currently has less than half of that ammunition left unless it engages in quantitative easing to further lower bond yields. CLW offers certainty to investors during uncertain times, anchored by strong government tenants and a Weighted Average Lease Expiry (WALE) of 12.5 years.
- Record low deposit and government bond rates. 10 Year Australian Government Bonds are currently yielding 1.3%, only marginally greater than the 1.25% cash rate. The top five flexible online savings accounts offer no more than 2.2%.
10 Year Australian Government Bond Yield:
CLW currently offers a 5.2% yield, more than double the highest flexible online savings rates and quadruple the 10 Year Australian Government Bond yield. This return offers a significant premium to investors with low additional risk.
BWP’s tenants are large format retailers, in particular, Bunnings Warehouses, Australia’s leading home improvement retailer and major supplier to construction projects. Wesfarmers (owner of Bunnings) possess approximately 25% of the BWP Trust. This supports long-term stability since it is in Wesfarmers’ best interests for both Bunnings and BWP to prosper. Despite trading at a near 31% premium to NTA, BWP remains a compelling investment proposition, offering a 4.6% dividend yield and stable earnings growth.
2018/19 HY results demonstrate stable earnings growth coupled with conservative fiscal management:
Furthermore, the trust is lowly geared at 18.4%. Balance sheet strength allows BWP to take advantage of future opportunities. BWP has a relatively high cap rate of 6.4% when considering its risk profile and extended WALE. This cap rate could compress over time to increase investors’ capital gains.
Despite the vicissitudes of the business cycle, the factors which affect value in commercial real estate should result in continual value accretion to shareholders of REITS. The yield earned from REITS continues to be tax-effective through ongoing franking credits benefits.
To identify commercial real estate opportunities which suit your individual circumstances, please contact our the dedicated team at TGC.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered legal practitioner or financial or investment adviser.