- A-REIT reporting season was solid
- Earnings resilience remains a feature
- Brokers review themes to emerge
- Preferred sector exposures updated
By Chris Shaw
For the week ending August 31st, Australian REITs (real estate investment trusts) outperformed the broader market by delivering flat returns, this against a 0.5% fall for the market overall. Helping the outperformance was a solid profit reporting season for the sector, BA Merrill Lynch noting on average A-REIT earnings were 0.6% better than had been forecast. Earnings showed overall growth of 2.7% relative to FY11.
Earnings resilience was also a feature of A-REIT reporting season, as BA-ML points out no company reported earnings more than 1.0% below what the broker had forecast despite challenging operating conditions.
This resilience should continue, as despite lowering forecasts in earnings per share (EPS) terms by 0.5% post the reporting season, BA-ML continues to forecast 3.1% earnings growth in FY13. Dividend growth should be even better at a forecast 4.1% for the coming year.
Having reviewed reporting season for A-REITs, key sectoral themes to emerge in the view of JP Morgan are CEO changes, inconsistent earnings definitions, an increase in payout ratios, some hedge restructuring, a decline in debt costs and a focus on cost cutting.
Both Mirvac ((MGR)) and Stockland ((SGP)) announced surprising changes in CEO, while the likes of FKP Property ((FKP)) and Aspen Group ((APZ)) are also undergoing some management changes. Some companies in the sector are moving away from EPS as a measure of earnings as evidenced in the latest reports, while JP Morgan notes a number of A-REITs are taking advantage of low interest rates to re-set out-of-the-money interest rate hedges.
Lower interest rates also meant debt costs for many A-REITs were lower than in FY11, JP Morgan noting this has been a slight positive for margins across the sector. Cost cutting has also helped in this regard, with management teams looking for ways to boost returns in what remains a lower growth environment.
In terms of vacancy trends in FY12, BA-ML notes retail vacancies showed no increase, though more marginal developments are being deferred at present. Office portfolios delivered good results with respect to declines in vacancies, which helped deliver solid net operating income growth.
BA-ML also notes property cap rates are showing some sign of improvement given recent reductions in bond and risk-free rates, though valuers continue to remain conservative. BA-ML's numbers suggest the average net tangible asset of the sector improved by 0.2% in year-on-year terms.
One trend of interest to JP Morgan is that over the past 18 months A-REITs have been in defensive mode, being net sellers of assets and using the proceeds to buyback stock and strengthen group balance sheets. But with discounts to net tangible assets now closing this buyback activity has slowed, leading JP Morgan to suggest the market may see A-REITs become more aggressive in terms of reactivating development pipelines and becoming net acquirers of assets.
This trend has just started to emerge, as JP Morgan estimates the total volume of domestic property transactions in August was $770 million. For the past 12 months there were a total of 107 major transactions, totalling $12.6 billion.
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