Luxury brands and higher rents in CFS Property Retail’s future

The real estate investment trust (REIT) CFS Property Retail Trust (ASX: CFX) owns 29 retail properties worth $8.6 billion. Managed by Colonial First State Global Asset Management, its properties are regional, super-regional and retail outlet shopping centres.

Rental income came to $725 million, only slightly down from last year’s $727 million, and net profit after tax but before abnormals was $359.7 million, the highest it has been in the last 10 years. Due to a write-down in the value of property of $64.7 million, final NPAT came to $295.2 million. This is down 27.8% from $409.2 million.

Despite this reduction in final profit, the company set the distribution per security to 13.6 cents, up from 13.1 cps in 2012. This distribution is actually more than the earnings per share, which is not uncommon for the company to do. All of the past 10 years’ distributions have either been equal to or greater than the trust’s EPS. This is done to provide stable income to shareholders. The company receives its management fees upfront, and all net earnings are distributed amongst the shareholders.

Its retail spaces are 99.4% occupied, and rents are based partly on the sales of the renting businesses, with specialty tenancies attracting a 5% annual rental increase.

By monitoring the moving annual turnover of the various stores and businesses, it can also get a feel for the general economic mood of retailers and customers. CFX Fund Manager Michael Gorman said in an annual results release that “… several macroeconomic indicators remain supportive for retail expenditure. Positive real wages growth continues, the housing market is picking up and the rate of growth in offshore travel has slowed in recent months compared to previous years.”

The total sales turnover of its retail tenants is increasing, and quite a number of them have been reviewing their operating models to implement significant efficiency gains. The tenants need to raise their own revenues and profits to be successful, and if they succeed, then the trust earns more in rental income.

Currently, it is developing the Emporium Melbourne Project, which will have a variety of concept and large flagship stores and house some of the world’s best international and luxury brands, as well as Australia’s most noted fashion labels and iconic food operators,

Another key development under construction is the DFO Homebush in Homebush NSW — a $100 million project that will have such retailers as Armani, Zegna, Michael Kors, Burberry, Max Mara and Bose.

Mr. Gorman said, “CFX will focus on delivering further value through the intensive asset management of our portfolio, refining the tenant mixing and driving traffic and sales performance.” Its plan is to refine the quality of its portfolio through the sale of non-core sub-regional shopping centres.

Foolish takeaway

Although retail is still at an optimum now, the growth and return to normalcy can be seen through the trust’s rental income, and its focus on luxury brand labels in its biggest developments is a sign that it is confident in the mid-term.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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