Category: Property

The strategy is to be vertically integrated, enabling Lendlease to generate income from each stage of the process: deal structuring and financing, value-add via planning approvals, developer fees, construction fees, and fund management fees if the assets are ultimately purchased by its property management platform.This strategy appears to be working well, with Lendlease able to leverage its successful track record in Australian projects into secure similar large-scale urban renewal projects globally. While Lendlease has managed development risk to date by securing presales and utilising third-party capital, shareholders could be exposed to capital losses if interest rates spike, or a sustained economic downturn triggers falls in the value of property assets.

Key Investment Considerations

• Disclosure is opaque, making it difficult to see financial performance at a divisional level. High business complexity and long-dated earnings potential makes it difficult to estimate fair value precisely.

• Construction is inherently cyclical and competition is fierce. Consequently, margin on large projects are thin, which means a firm can suffer large losses if it doesn’t understand or correctly price construction and design risks.

• Earnings growth in residential development has been robust in recent years, but high Australian dwelling prices and rising supply will make this very difficult to sustain.

• Lendlease Group is a diversified property and development empire. Operations have condensed from 40 countries in 2009 to less than 20 today, with key operational regions being Australia, North America, United Kingdom Like other diversified property owners and developers, Lendlease is increasingly using third-party capital on developments. This reduces pressure on its balance sheet, facilitates higher return on equity and reduces development risk, but the trade-off is lower potential development profits.

• The Lendlease pipeline of major projects has expanded, but most are in an early phase of delivery, meaning the group has yet to reap full benefits from its vertically integrated businesses.

• A solid balance sheet post raising equity in April 2020, and good access to third-party capital from its fundsmanagement platform mean that Lendlease likely benefits from a development-funding cost that is lower than those of most competitors.

• With government balance sheets increasingly strained, and there being a desire to promote economic activity via construction, the public sector will return to private-public partnership models to fund long-term infrastructure, and other stimulus measures. Lendlease is well positioned to participate in this growth because of its expanding footprint and capable management.

• With about a fifth of EBITDA derived from the construction division, a substantial portion of group operating earnings is nonrecurring. As such, a steady stream of work needs to be secured to maintain earnings. This is looking challenging, given constraints on the government budget, corporate constraints, and falling commodity prices.

• Earnings in recent years were propped up by rising asset values and central bank cutting interest rates. Sustained and large falls in asset values could ensue if coronavirus shutdowns last longer than expected or recur, and this would hurt earnings, as asset values will decline and borrowing costs will increase materially.

• Lendlease maintains a significant amount of capital in development projects. With property prices elevated across the globe, Lendlease has high exposure to a slump in residential and commercial property prices.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Further out, though, we expect earnings to moderate due to affordability constraints, weak wage growth, and a smaller pipeline. We expect Mirvac to gain market share amid tough conditions, due to its scale and land bank. The group’s commercial property portfolio faces uncertainty from COVID 19. The scorching pace of rental increases seen in office markets in 2019 looks like it will unwind. Meanwhile, we expect existing pressures on retail to continue and likely accelerate.

Key Investment Considerations

• Because of near-full occupancy and long leases with rental uplifts, medium-term earnings from commercial property are relatively secure. But further out, we expect pedestrian rental growth.

• Though employees will eventually return to offices, supply and caution from businesses portend a fall in office rents and lacklustre growth thereafter.

• Very low government bond yields increase the relative attractiveness of Mirvac’s income stream, but the share price could retrace sharply to any unexpected jump in bond yields, a prolonged economic downturn, or further negative earnings surprises.

• A resumption of inbound immigration should support the value of Mirvac’s assets and underpin the viability of major development projects that the group has in its pipeline.

• Mirvac has been shifting toward industrial exposure, a sector that was less affected by the coronavirus, and could benefit as businesses seek to invest in local supply chains and e-commerce capabilities.

• Demand could continue for quality real estate from the likes of pension funds, sovereign wealth funds, and other offshore investors, especially as the Australian economy has dealt with the coronavirus health crisis better than some, which could allow a faster resumption of business activity.

• Mirvac has heavy exposure to retail department stores, one of the hardest-hit segments in the entire property space.

• Capitalisation rates on property are unsustainably low. While government bond yields are likely to remain low compared with history, property is not a risk-free asset and should be priced with appropriate risk premiums.

• Office and industrial rents increased dramatically but are expected to unwind due to coronavirus lockdowns and economic weakness, particularly for office.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Reputation, experience, and capability are paramount when tendering for work, and Monadelphous developed a strong track record for successful project management, execution, and delivery. Its core skills, knowledge, and ability are in recurring maintenance contract work. The company’s work-in-hand was in steady decline after the 2015 peak in Australia’s LNG construction boom but we think fiscal 2020 is an earnings nadir and new and/or expansion projects from the iron ore, coal, and liquefied natural gas, or LNG, sectors will now drive earnings growth.

Key Investment Considerations

• Monadelphous must continuously deliver high-quality financial and operational performance on major engineering and maintenance projects to maintain margins and reputation.

• Monadelphous will only achieve earnings growth if global economic conditions support buoyant investment in domestic mining and energy projects.

• Monadelphous has a healthy balance sheet, solid cash flow, and experienced senior management.

• Monadelphous has established an excellent reputation for execution and delivery of structural, mechanical, and electrical work on completed projects, positioning the firm well for future business from large mining and energy companies.

• The company can leverage the skills, knowledge, and experience gained working on smaller projects into contract wins on larger projects, particularly in the energy, power, and water sectors.

• Monadelphous has reduced risk relative to peers by partially diversifying into water, power, and marine infrastructure construction and maintenance, which may eventually limit the negative impact on earnings of the downturn in mining and energy work.

• Monadelphous is ultimately dependent on the commodities and energy investment cycle and global demand. Any major slowdown in economic conditions in China will significantly affect the company’s earnings profile.

• Monadelphous has steadily decreased staff numbers. Inefficiencies and a fall in productivity are possible as fewer employees are utilised on major projects.

• Monadelphous’ growth is strongly dependent on key customers, resulting in concentration risk, which is mitigated through multiple contracts across various projects and commodities in numerous locations. However, project deferments by a major client or problems with project execution could significantly affect future profitability.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Vicinity’s assets are high quality but have exposure to tourism and luxury consumption, leaving earnings vulnerable to coronavirus shutdowns and economic thrift. Some assets have redevelopment potential, including the addition of apartments, hotels and offices. Vicinity’s AUD 14 billion of directly and indirectly owned malls are skewed to larger shopping centres. By official classifications, it has about 22% in super-regional, 29% in regional, 16% in CBD, 19% in subregional, 12% in outlets, and 1% in neighbourhood centres.

Key Investment Consideration

• Vicinity Centres is more sensitive to the economic cycle than most other retail REITs due to its exposure to tourism, CBD, and luxury spending.

• About half of Vicinity Centres’ portfolio is in Victoria, and about 16% in CBDs, mainly Melbourne, Sydney, and Brisbane. So far, these areas have been the most affected by the coronavirus. The remaining portfolio is diversified around Australia.

• Exposure to food, beverage, entertainment, and service based tenants increased since 2015. These categories are less prone to e-commerce competition but vulnerable to thrift, border closures, the absence of CBD workers, and social distancing.

• Vicinity is arguably the REIT most exposed to an economic and health recovery. Should a effective treatment for COVID-19 be developed, Vicinity would likely outperform other REITs as conditions normalise. OVicinity has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.

• Vicinity has substantial development opportunities, including the Bankstown and Box Hill town centres, Chatswood Chase upgrade, and apartment developments at The Glen.

• Even if regulations on distancing and borders return to normal, consumers have already begun to form new habits, including working from home, shopping online, and thrifty shopping habits.

• Vicinity has about a fourth of its leases up for negotiation in fiscal 2021, meaning it is more exposed to the economic downturn than rival REITs.

• Vicinity is much more exposed to border closures and work-from-home trends due to its substantial reliance on tourism and luxury spending, and CBD office workers.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

It should also get an incremental rental boost from planned upgrades and along with profits from divestments, we expect it to maintain and gradually grow its distributions. There continues to be significant investor demand for warehouse properties. The trust has sensibly not acquired properties at today’s inflated prices. But its strong balance sheet provides it with the flexibility to do so if better opportunities arise.

Key Updates

• BWP’s defensive and growing distributions are likely to be attractive to investors in the low interest rate environment.
• The firm’s more than 20-year history in investing in warehouse properties has created significant value for security holders and provides it with the foundation to benefit from Wesfarmers focusing future investments in Bunnings.
• Although it has not been acquiring properties at current elevated prices, BWP’s strong balance sheet provides it with the flexibility to acquire properties if opportunities arise.

Company Profile

BWP Trust is an Australian REIT focused on owing warehouse/bulky goods retailing properties with relatively large sites and high visibility and access to arterial roads. The portfolio of properties it owns are diversified across most Australian states and are on long-term leases to Australia’s dominant home improvement chain: Bunnings Group. Bunnings is a wholly owned subsidiary of Wesfarmers Ltd. Wesfarmers is a wide-moat, top 10 ASX listed company by market capitalisation. BWP Trust is also externally managed by a wholly owned subsidiary of Wesfarmers and Wesfarmers also owns 24.8% of the units in the trust.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Distribution growth could also be hurt by normalisation of interest rates. The Reserve Bank of Australia and major global central banks plan to keep overnight cash rates low for another couple of years but rising inflation and runaway property prices could trigger an earlier move. Long-term bond yields have already started rising. Australian government 10-year bond yields increased from 0.8% in October last year to 1.6% currently. Regardless of timing, with official interest rates not far above zero and significantly below inflation, the next move is likely to be

up. Rising interest rates should push up the cost of borrowing for all firms, reducing profitability. They should also cause a de-rating of income stocks. But it’s not all bad. Most of BWP’s rents are linked to CPI growth.

BWP’s environmental social and governance, or ESG, risks primarily relate to the environmental impact of its buildings and general corporate governance risks, but we consider these risks to be very low. Therefore, we don’t incorporate ESG risks into our base- or bear-case scenarios, nor do we expect material value destruction from ESG issues to undermine the economic moat. The key risk facing the trust is Bunnings vacating properties for bigger and better sites nearby. But these properties can likely be sold or redeveloped without losing much value. In densely populated areas, the properties could actually have upside potential from redevelopment

Financial Strength

The trust is in a strong financial position. At Dec. 31, 2020, the trust had very low gearing (debt/total assets) of 17.8%, at the bottom of its target gearing range of 20% to 30%. Interest cover (earnings before interest/interest expense) of 8.8 times is also considered conservative. It also has a high investment-grade issuer credit rating of “A3 Stable” from Moody’s Investors Service and “A- Stable” from Standard & Poor’s. Combined with its defensive recurring rental income stream, we believe the trust’s strong balance sheet and investment-grade credit ratings provide it with the flexibility to take advantage of investment opportunities if they present themselves. Average debt duration is relatively short at 2.7 years. But we believe refinancing risk is low given conservative gearing, ample liquidity and defensive earnings.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.