The Motley Fool

Have we found some hidden gems in Australia’s A-REIT sector?

Let’s face it, Australia’s A-REIT or property trust sector is normally a boring topic, not least because they are usually boring businesses.

But the sector has in the past provided some stunning returns, particularly for those investors looking for regular income. Owning and renting out property is not exactly an unknown past time for many Australians – which suggests we should really have more of an affinity for the A-REIT sector.

The problem is quietly likely an issue the sector created for itself. During the GFC, a number of property trusts went to the wall or almost went bust after they tried to juice their returns by taking on truckloads of debt and levering up their exposure. Many investors were put off by that and have refused to even revisit the sector. The fact that many A-REITs don’t pay huge dividends like they used to, with many unfranked as well, turns investors off the sector.

Here are our views on a number of A-REITs and one retirement village operator included in the S&P/ASX 200 (Indexasx: XJO) (ASX: XJO).

Abacus Property Group (ASX: ABP)

Currently trading at $2.96, Abacus offers a dividend yield of 5.7% (unfranked). The company holds a diversified portfolio of commercial, storage, industrial and retail properties and posted a 50% increase in net profit in the last half year to $69.1 million. The only problem is that at the end of December 2014, net tangible assets per share were $2.42 – well below the current price. The current yield doesn’t compensate for that, although the current P/E ratio stands at 12.2x, suggesting Abacus could be worthy of further research.

Charter Hall Group (ASX: CHC)

Charter Hall owns and manages 270 commercial properties around Australia, including office buildings (37%), retail centres (27%), hospitality (14%) and industrial assets (22%). The company also operates a property funds management business and has $12.7 billion of funds under management. The company is forecasting 7-9% growth in operating earnings per security for the 2015 financial year and currently pays an unfranked dividend of 5.1% at the current price of $4.77. Add in a PE ratio of more than 17x, a complex business and I’m giving Charter Hall a wide berth.

Growthpoint Properties Australia Ltd (ASX: GOZ)

Growthpoint is far less complicated than Charter Hall, with no funds management or development operations. The company invests purely in a portfolio of 53 industrial (36) and office (17) assets valued at around $2.3 billion. Woolworths Limited (ASX: WOW) is Growthpoint’s biggest tenant, contributing 23% of passing rent. The company is forecasting a distribution (dividend) of 20.5 cents this financial year, putting it on a yield of 6.6% (unfranked). An undemanding P/E ratio of around 14.5x suggests Growthpoint could also be worth a closer look.

DEXUS Property Group (ASX: DXS)

DEXUS has Australia’s largest listed office property portfolio valued at $7.6 billion and an additional $1.5 billion in industrial properties. The company also runs a funds management business and a property-trading portfolio. At the current price of $7.53, DEXUS is forecasting a distribution of 41.04 cents for a dividend yield of 5.5% (unfranked) on underlying earnings of 59.48 cents for the 2015 financial year. Dexus could be worthy of further research.

Investa Office Fund (ASX: IOF)

As the company’s name implies, Investa primarily holds office assets –worth more than $3 billion earlier this year across 22 assets. 10 of those properties are located in Sydney, representing 59% of portfolio value. Victoria and Queensland add another 18.4% and 15% respectively. Currently paying a 4.8% dividend yield, trading well above net tangible assets of $3.42 and a prospective P/E ratio of around 17x suggests Investa is expensive.

Charter Hall Retail REIT (ASX: CQR)

Charter Hall Retail owns and manages a portfolio of Australian retail assets valued at around $2.1 billion with net tangible assets per unit of around $3.52 (current price is $4.33). The ~77 properties are primarily supermarket-anchored neighbourhood shopping centres and sub-regional centres. Anchor tenants such as Coles – owned by Wesfarmers Ltd (ASX: WES) and Woolworths make up 48% by value with around 33 located in NSW. At the current price of $4.33, Charter Hall Retail is paying a 6.4% yield (unfranked) and trading on a P/E ratio of around 14.4x. More research is required, particularly the comparison with peers Scentre Group Ltd (ASX: SCG) and Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP).

Federation Centres Ltd (ASX: FDC)

Federation Centres has had an illustrious history, recently merging with Novion Property Group (ASX: NVN). The company has announced plans to change its name to ‘Vicinity Centres’, but was previously known as Centro Retail Australia (and before that Centro Retail Trust), and related to Centro Property Group (CPG). CPG was the once high-flying shopping centre owner hit hard by the global financial crisis and collapsed in December 2007, after being unable to repay its loans.

Federation is now one of Australia’s largest property trusts or A-REITs, with $22 billion in assets under management, across 102 owned/managed assets. 32% of the portfolio is leased to supermarkets and another 33% to specialty stores. Department stores make up just 5%. Investors might want to wait and see the combined group’s first financial result before committing.

Aveo Group (ASX: AOG)

Our sole property developer, Aveo has also undergone a transformation – previously known as FKP Property Group. Aveo focuses on developing, operating and managing retirement villages. The company now has 75 villages around Australia across several states.

Aveo is forecasting more than a 20% increase in net profit for the 2015 financial year, after recording a 26% increase in first-half profit. But the company is trading on a forecast P/E ratio of around 27.6x and paying a dividend yield of 1.9%, suggesting it’s not cheap. On the flipside, Aveo is targeting to double its earnings before interest (EBIT) to around $100 million in the financial year 2018, which could make today’s price look cheap.

Foolish takeaway

Unfortunately, no real standout cheap, quality stock has popped its head out from the list above, but it does give us a number to take a closer look at, particularly Abacus, Aveo and Growthpoint.


5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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.

Related Articles...