The Motley Fool

Meet a high-yielding property stock on an upgrade path

Retail property trust Shopping Centres Australasia Property Group Re Limited (ASX: SCP) is likely to build on its stellar gains when it comes out of its trading halt tomorrow.

SCA Property Group is undertaking a $50 million capital raising and while tapping the market for cash would typically trigger a sell-off, I think this raising will be well supported given that management has also upgraded its earnings forecast for the group.

The shopping centre owner will use the proceeds to fund the recently acquired Mount Warren Park in Queensland and the purchase of three other malls in Tasmania for $99.4 million, which implies a respectable weighted average capitalisation rate of 7.93%. This rate reflects the expected yield of the investments.

While the cash injection and latest acquisitions will be earnings neutral for 2014-15, management is expecting the transaction to give a 2%-plus boost to its distributable earnings for the next financial year.

What’s more, lower debt costs and previous acquisitions such as Clemton Park and Whitsunday Shopping Centre have prompted the trust to increase its distributable earnings guidance to 12.8 cents a unit (which can be regarded as similar to earnings per share) from 12.6 cents.

The earnings upgrades may sound modest but everything is relative. Consensus forecast is tipping a 1.8% increase in distributable earnings per unit for 2015-16, so the latest acquisitions will effectively double the expected growth rate and put the trust on a forecast yield of just under 6%.

Management will provde an earnings guidance for 2015-16 when it announces its full year results in August.

SCA Property Group has been a strong performer over the past 12 months with a 21% jump to $2.13, when the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is struggling to keep above breakeven.

That’s not unusual as most real estate investment trusts have performed well thanks to yield-hungry investors.

But I am not keen on this class of stocks as I think yield alone won’t be able to keep pushing the stock much higher.

I am not saying the yield trade is dead but I think income stocks that will outperform in the next 12 months will need to deliver earnings growth that is ahead of CPI.

On that front, SCA Property is probably in a better position than most of its peers but I think there are better options out there that are trading on more attractive fundamentals.

Looking for a better income stock idea? Sign up for free below to see what the experts at the Motley Fool have uncovered.

JUST RELEASED! Our top dividend stock for 2015-2016

If you’re after fat, fully franked dividends, you won’t want to miss this. The Motley Fool has just issued a brand-new report, complete with all the details on our expert analysts’ #1 dividend stock for 2015-2016. Click here now for your FREE copy, including the name and code!

Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter -

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.