Category: Property

Business Strategy and Outlook

Shopping Centres Australasia Property Group (SCA) owns and manages a portfolio of about 85 smaller shopping centres in Australia. Gross rental income is about evenly sourced from anchor tenants such as supermarkets, and smaller specialty tenants. SCA actively manages its portfolio, remixing specialty tenants, undertaking developments, and acquisitions and divestments. From its 2012 listing through to June 2020 SCA acquired more than 50 neighbourhood and subregional assets, and divested more than 30 freestanding and neighbourhood assets. 

Morningstar analysts expect SCA to persevere with its strategy of active management, and to remain focused on neighbourhood locations. Even the larger assets in its portfolio are at the smaller end of the “subregional” category, with less floor space dedicated to department stores than other sub regional assets. Morningstar analysts don’t rule out SCA acquiring larger assets, but analysts see that as likely only if market dislocation creates irresistible acquisition opportunities. The neighbourhood property space is so fragmented Morningstar analysts think acquisitions in that segment are more likely. 

What Lockdown? Strong December Half From Shopping Centres Australasia; FVE Up 9%

Shopping Centres Australasia, or SCA, delivered a strong first-half result, and Morningstar analysts increased its fair value estimate by 9% to AUD 2.55 per unit. The main driver of increased valuation is the remarkable defensiveness of SCA’s convenience assets, proven by their performance through lockdowns. Morningstar analysts think SCA can, and will, run higher gearing toward the midpoint of its target range of 30%-40% net debt/assets, holding more assets in its portfolio and thereby generating a higher earnings yield over time.

Financial Strength 

SCA is in solid financial health after about AUD 280 million of equity was raised in April 2020, bolstering the balance sheet. Gearing reduced from 34% as at December 2019 to 26% in June 2020 (as measured by look-through gearing, which is net debt/assets, including debt obligations in underlying vehicles such as SCA’s funds). As recovery ensued, gearing rose to 32.5% as at December 2001.Other things being equal, SCA’s assets could more roughly halve in value before it would breach the 50% gearing limit specified in its banking covenants. SCA’s interest cover ratio was 6.0 times at December 2021, triple the covenant limit of 2 times. We expect gearing to rise gradually due to acquisitions, to roughly the midpoint of SCA’s target gearing range of 30%-40%.

Bulls Say

• About half of income comes from supermarkets with long leases that have remained open even during COVID-19 lockdowns, suggesting that SCA’s income is resilient. 
• Despite interest rate rises on the horizon, discount rates are unlikely to rise as high as historical levels on property assets that can consistently generate income. 
• Good anchor tenants generate foot traffic, and SCA charges rent well below levels in high-end discretionary focused shopping malls, suggesting that SCA is less vulnerable to e-commerce.

Company Profile

Shopping Centres Australasia Property Group owns a portfolio of smaller shopping centres. About half of rental income comes from anchor tenants, typically Woolworths or Coles businesses, or in some cases discount department stores. Despite its Australasian name, the assets are mostly in regional or suburban areas of Australia, and the group divested its New Zealand assets in 2016. The portfolio assets are neighbourhood (about 75% by value) and subregional (25%) shopping centres

(Source: Morningstar)

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.

Business Strategy and Outlook

James Hardie Industries is the clear leader in fibre cement siding and internal lining products in North America and Asia-Pacific. After patenting cellulose-reinforced fibre cement in the late 1980s, the Australian company entered the North American market in 1990, establishing its business with the benefit of patent protection. In doing so, the company’s product line has become synonymous with the product category. The firm now enjoys 90% share in fibre cement siding in North America, its largest and most important market, with similar positions in Australia and New Zealand. More recently, James Hardie has entered the Philippines and European residential siding markets.

Fibre cement siding possesses durability advantages and superior aesthetics over vinyl cladding, leading to vinyl’s market share eroding to about 26% today from around 39% in 2003. At this same time, fibre cement’s share has increased to 19%, almost entirely due to increased penetration for Hardie’s product. With Hardie the clear leader in fibre cement systems, it is expected that the firm will continue to take share from vinyl while maintaining its own position within its category.

Financial Strength

James Hardie announced an ordinary first-half fiscal 2022 dividend of USD 0.40 per share after regular dividends were suspended in early fiscal 2021 in response to the pandemic. It is forecasted that an annual full-year payout ratio of 65% of underlying earnings, near the top-end of Hardie’s 50%-70% targeted payout range. Hardie runs a conservative balance sheet with leverage typically within a targeted range of 1-2 net debt/EBITDA. Net debt/EBITDA stood at 0.8 at the end of fiscal third-quarter 2022.Hardie’s asbestos-related liability–the AICF trust–has a gross carrying value at fiscal third-quarter 2022 of USD 1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of trailing free cash flow. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest and thus expand and protect its competitive positioning. 

Bulls Say’s 

• James Hardie’s clear leadership in the fibre cement category should drive growth in market share in the North American siding market. We forecast the company retaining its 90% share of the category, while fibre cement climbs to 28% of the total housing market. 
• Hardie’s strong brand equity translates into pricing power, allowing for inflation in manufacturing costs to be easily passed on, thus protecting profitability in the face of imminent input cost inflation. 
• The Fermacell acquisition could finally unlock Europe as an avenue of significant growth following market saturation in North America

Company Profile 

James Hardie is the world leader in fibre cement products, accounting for roughly 90% of all fibre cement building materials sold in the U.S. It has nine manufacturing plants in eight U.S. states and five across Asia-Pacific. Fibre cement competes with vinyl, wood, and engineered wood products with superior durability and moisture-, fire-, and termite-resistant qualities. The firm is a highly focused single-product company based on primary demand growth, cost-efficient production, and continual innovation of its differentiated range. With saturation of the North American market in sight, the acquisition of Fermacell in early 2018, Europe’s leading fibre gypsum manufacturer, will provide Hardie with a subsequent avenue of growth.

(Source: Morningstar)

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.

Business Strategy and Outlook:

Hotel Property Investments generates predictable and growing revenue, with long-term leases and contracted rental increases getting a boost from the recent uptick in inflation. But the no-moat REIT also faces material risks. The main tenant is highly geared and faces threats from COVID-19 lockdowns and social distancing rules. Overall, the stock is considered to be fairly valued, with fair value estimate of AUD 3.10 per unit. Hotel Property Investments offers a forecast fiscal 2022 yield of 6% with modest growth potential. It has a long weighted average lease term of over 10 years and mostly triple-net leases that see the tenant pay for most property costs, including maintenance capital expenditure. Lease expiries are relatively well spread, with just 13% expiring in the five years to 2026 and a further 40% in the five years thereafter. In fiscal 2021, occupancy was 100%.

Another key positive is that contracted rental growth is high relative to most REIT peers. Two thirds of leases have annual rent uplifts of the lesser of 4% or twice the average of the last five years’ CPI inflation. However, rents reset to fair market rates when leases expire so actual rent growth over the long term is unlikely to be as strong as contracted rental uplifts suggest.

Financial Strength:

Hotel Property Investments’ credit metrics are relatively aggressive, with debt/assets of about 38%. This is significantly higher than peers, such as BWP at less than 20%.

Despite being mostly exposed to Queensland, which has so far experienced only minor impacts from COVID-19, Hotel Property Investments agreed to defer AUD 7.5 million of rent —equivalent to 12% of annual net rental income—for the main tenant for the period from April 2020 to September 2020. In addition, smaller tenants forced to close during lockdowns had rents abated, but this amounted to a negligible AUD 0.1 million in fiscal 2021. Further deferrals and abatements can’t be ruled out as lockdowns are a likely tool to control the spread of new variants. With interest rates currently low, the trust has been actively acquiring properties, including nine in fiscal 2021. The combination of acquisitions and rising property valuations have doubled the value of Hotel Property Investments’ property portfolio in the past eight years. Capitalisation rates are likely to ease lower in the near term to reflect recent market evidence, pushing book values up a little further.

Company Profile:

Hotel Property Investments is an Australian REIT with a portfolio of freehold pub properties primarily in Queensland. Its portfolio is almost exclusively leased to Queensland Venue Company on triple-net long-term leases where the tenant is responsible for outgoings (except land tax in Queensland), resulting in relatively low maintenance expenses. Most leases also provide for annual rental increases typically at the lower of 4% or two times the average of the last five years consumer price index.

(Source: Morningstar)

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.

Business Strategy and Outlook:

Lennar’s investments in ancillary businesses, such as its multifamily business and technology startups, distinguishes the company from many other homebuilders. Management announced plans to spin off its multifamily, single-family for rent, and land businesses, likely during the second or third quarter of fiscal 2022. Whether the market will place a higher multiple on SpinCo as a standalone entity has yet to be seen, but this transaction will result in meaningful value creation for Lennar’s remaining businesses. However, management’s narrowed focus on RemainCo operations could improve its prospects. Furthermore, the separation of these ancillary businesses, which tend to generate lumpier earnings, should also dampen Lennar’s earnings volatility.

In February 2018, Lennar completed its merger with CalAtlantic, the nation’s fourth-largest homebuilder. The deal was valued at $9.3 billion, and the combined entity surpassed D.R. Horton as the largest homebuilder (by revenue) in the United States. Based on our analysis, the Lennar-CalAtlantic has created shareholder value

Financial Strength:

The fair value of this stock has been increased by the analysts on account of optimistic near-term return on invested capital outlook and its significant debt reduction.

At the end of fiscal fourth-quarter 2021, Lennar had approximately $4.7 billion in outstanding homebuilding debt and $2.7 billion in homebuilding cash on hand, which equates to a 8.4% net homebuilding debt/capital ratio. In addition to the $2.7 billion of homebuilding cash on hand, $2.5 billion is available on Lennar’s revolving credit facility. Lennar has a strong balance sheet and plenty of liquidity. Homebuilding debt maturities are staggered through 2027 with approximately $5.1 billion due between 2022 and 2027. Lennar’s operating cash flow has improved substantially over the past three years, from $508 million in 2016 to $3.8 billion in 2020. 

Bulls Say:

• Current new-home demand is booming, and inventory of existing homes remains tight. The supply/demand imbalance will take years to address and will support pricing power for homebuilders. 
• Demand for entry-level housing should increase as the large millennial generation forms households. Lennar is well positioned to capitalize on this growing market. 
• Lennar’s multifamily segment is an underappreciated asset, which could get more market recognition after it is spun off.

Company Profile:

After merging with CalAtlantic in February 2018, Lennar has become the largest public homebuilder (by revenue) in the United States. The company’s homebuilding operations target first-time, move-up, and active adult homebuyers mainly under the Lennar brand name. Lennar’s financial-services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction and has invested in numerous housing-related technology startups.

(Source: Morningstar)

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.

Investment Thesis:

• Economic conditions appear to be improving ahead of expectations post the Covid19 related impact – this should be positive for asset revaluations and rents.
• Strong history of delivering continuing shareholder return and dividends.
• Solid balance sheet position.
• Strong property portfolio metrics.
• Selective asset acquisitions.
• Expiry risk is relatively low in the near-term.
• Attractive yield in the current low interest rate environment.

Key Risks:

• Regulatory risks.
• Deteriorating property fundamentals, including negative rent revisions.
• Deterioration in economic fundamentals leading rent deferrals etc.
• Sentiment towards REITs as bond proxy stocks impacted by expected cash rate
• hikes.
• Deterioration in funding costs

Key highlights:

Key financial and operational highlights for the period are:

Financial highlights:

• Operating earnings of $159.0 million, or 29.2cpu, up 3.2% on the prior corresponding period (pcp)
• Statutory profit of $618.3 million
• Distributions of 29.2cpu, up 3.2% on pcp
• NTA of $5.22, up 16.8% from $4.47 on 30 June 2020
• $523 million net valuation uplift, representing 12.1% uplift for FY21
• $652 million of equity raised in FY21
• Balance sheet gearing of 31.4%, in the middle of the target range of 25% – 35%
• Assigned Moody’s Baa1 investment grade issuer rating

Operating highlights:

• Portfolio weighted average lease expiry (WALE) of 13.2 years, providing long term income security
• $5.6 billion property portfolio, up from $3.6 billion as at 30 June 2020
• $1.4 billion of property acquisitions
• 48% triple net leases (NNN) across the portfolio where the tenants are responsible for all outgoings, maintenance, and capital expenditure
• Portfolio cap rate firmed 65 bps from 5.42% on 30 June 2020 to 4.77%.

Company Description: 

Charter Hall Long WALE REIT (ASX: CLW) is an Australian REIT listed on the ASX and investing in high quality Australasian real estate assets (across office, industrial, retail, Agri-logistics, and telco exchange) that are predominantly leased to corporate and government tenants on long term leases. CLW is managed by Charter Hall Group (ASX: CHC). 

(Source: Banyantree, www.charterhall.com.au)

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.

Investment Thesis:

• Quality assets with strong property fundamentals such as WALE increasing to 15.2 years 
• Majority of leases are triple-net leases 
• CQE is a play on (1) population growth; (2) increasing awareness of early childhood education; (3) increasing number of families with both parents working and hence demand for childcare services. CQE has increased its portfolio weighting towards social infrastructure assets. 
• CQE’s tenants possess strong financials 
• Strong history of delivering continuing shareholder return and dividends 
• Solid balance sheet position
• Strong tailwinds for childcare assets and social infrastructure assets

Key Risks:

• Regulatory risks
• Deteriorating property fundamentals 
• Concentrated tenancy risk, especially around Goodstart Early Learning 
• Sentiment towards REITs as bond proxy stocks impacted by expected cash rate hikes 
• Broader reintroduction of stringent lockdowns across Australia due to Covid-19

Key highlights:

• CQE saw revaluation uplift of $119.4m, up +11.1% net of capex and on a passing yield of 5.6%
• Statutory profit of $174.1m, up +103.4%
• Operating earnings of $58.0m, up +13.5%. Operating earnings of 16.0cpu, down -3.0% on pcp
• CQE retained a strong capital position with balance sheet gearing of 24.5% and look-through gearing is 25.6%. CQE has no debt maturity until May 2024 and a weighted average debt maturity of 4.1 years
• CQE acquired (i) Mater Health corporate headquarters and training facilities for $122.5m (ii) South Australian Emergency Services Command Centre and adjacent car park (in construction), for $80m
• CQE acquired three new childcare properties for $12.6m (purchase yield of 6.4%; all leased to ASX-listed tenants on average lease expiries of 20 years)

Company Description: 

Charter Hall Social Infrastructure REIT (formerly Charterhall Education Trust) (ASX: CQE) is an ASX listed Real Estate Investment Trust (REIT). It is the largest Australian property trust investing in early learning properties within Australia and New Zealand but recently widen its mandate to also invests in social infrastructure properties.

(Source: Banyantree)

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.

Investment Thesis:

• Engineering and Services Business sale process is underway – this removes one downside risk to the stock. 
• Balance sheet remain in solid position and even with the latest provision the Company has headroom available and is within its banking covenants. However, gearing is expected to rise to ~20% as development ramps up to FY23. 
• Robust development outlook with demand for both commercial and residential especially with strong level of apartment pre-sales. 
• Outlook for new infrastructure projects to be tendered in Australia in the next 2 years remains attractive.
• New management team will likely bring a fresh perspective and strategy. 
• Proposed cost out program of $160m should be supported of earnings in a tough trading environment.
• Valuation appears undemanding.

Key Risks:

• Further provisions to the existing problem projects. 
• New projects mispriced from a risk perspective. 
• Cut to dividends. 
• Sudden increases in interest rates. 
• Increase in apartments default rate. 
• Any delays or execution problems in development and construction that sees margin being affected. 
• Any net outflows from its investment management business.

Key highlights:

• LLC saw FY21 core operating profit after tax surge +83% over pcp to $377m leading to +230bps improvement in ROE to 5.4%
• LLC completed preliminary findings from a wide-ranging business review commenced by the new CEO, announcing plans to strip out $160m in costs each year that will put it in a better position to respond to an upturn in the construction and development markets it is expecting in FY23.
• Strong balance sheet with gearing of 5% well below 10-20% target range.
• LLC is still targeting $8bn+ development production by FY24 at a ROIC of 10-13%.
• Core segment EBITDA of $918m increased +27% over pcp, driven by Construction (up +71% over pcp) and Development (up +46% over pcp), partially offset by Investments (down -8% over pcp)
• Core operating NPAT of $377m increased +83% over pcp and core operating EPS of 54.8cps (up +60% over pcp) due to higher number of weighted average securities following capital raising in FY20, leading to ROE of 5.4% (up +230bps over pcp)
• The Board declared final distribution of 12cps, taking FY21 distributions to 27cps (vs no distribution in pcp) reflecting a pay-out ratio of 49%, within Board’s stated target range of 40-60% of core operating earnings
• The results by segment are: 

• Development segment delivered EBITDA of $469m, up +46% over pcp, primarily driven by two residential towers at One Sydney Harbour, Barangaroo (contributed $325m to EBITDA), forward sale of Melbourne Quarter Tower and a new JV partnership at Milan Innovation
• Construction revenue of $6.4bn declined -16% over pcp, with activity still impacted by delays in the commencement of new projects and ongoing productivity impacts across sites
• Investments segment recovered from the worst of the COVID impacts, with Asset management revenue increased +32% over pcp to $139m, driven by $1.3bn of redevelopment activity secured across the US residential portfolio

Company Description: 

Lend Lease Corporation (LLC) is a global property developer with three key segments in (1) Development: involves development of communities, inner city mixed use developments, apartments, retirement, retail, commercial assets and social infrastructure (with earnings derived from development margins, development management fees received from external co-investors and origination fees for infrastructure PPPs) (2) Construction: involves project management, design, and construction service, predominately in infrastructure, defence, mixed use, commercial and residential sectors (with earnings derived from project and construction management fees and construction margin); and (3) Investments: involves wholesale investment management platform, LLC’s interests in property and infrastructure co-investments, Retirement and US military housing (with earnings derived from funds management fees as well as capital growth and yield from co-investments and returns from LLC’s retirement portfolio and US military housing business). LLC operates predominately in Australia, but also in the UK and US and with a smaller contribution to earnings derived from the Asia Pacific.

(Source: Banyantree)

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.

Investment Thesis

• Largest producer of non-asbestos fibre cement 
• Ongoing momentum in the U.S. housing market and global markets. 
• Fibre cement taking market share from vinyl and other siding products. 
• Strong R&D program to stay ahead of competition. 
• Leveraged to a falling AUD/USD. 
• New CEO may bring a fresh perspective on existing strategy. 
• Productivity gains. 
• Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

• Competitive pressures leading to margin decline. 
• Input cost pressures which the company is unable to pass on to customers. 
• Deterioration in housing starts (U.S., Australia). 
• Unable to achieve its growth and market share target, which likely see a derating of the stock. 
• Adverse movements in asbestos claims. 
• Disappointing primary demand growth (PDG) relative to market expectations. 
• Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

• Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
• Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
• Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
• Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
• Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(Source: BanyanTree)

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.

Investment Thesis

• Largest producer of non-asbestos fibre cement 
• Ongoing momentum in the U.S. housing market and global markets. 
• Fibre cement taking market share from vinyl and other siding products. 
• Strong R&D program to stay ahead of competition. 
• Leveraged to a falling AUD/USD. 
• New CEO may bring a fresh perspective on existing strategy. 
• Productivity gains. 
• Investment plan over the next 3 years should deliver solid earnings growth.

Key Risks

• Competitive pressures leading to margin decline. 
• Input cost pressures which the company is unable to pass on to customers. 
• Deterioration in housing starts (U.S., Australia). 
• Unable to achieve its growth and market share target, which likely see a derating of the stock. 
• Adverse movements in asbestos claims. 
• Disappointing primary demand growth (PDG) relative to market expectations. 
• Manufacturing / operational issues impacting earnings.

2Q22 Results Summary

• Net sales increased +23% over pcp to US$903.2m, driven by volume growth (up +14%) and price/mix improvement (up +9%).
• Group adjusted operating earnings (EBIT) were up +26% to US$205.7m, delivering an EBIT margin of 22.8%. Earnings were driven by top line growth and ongoing operational improvement.
• Segment revenue was up +23% to US$635.3m, driven by exteriors volume growth of +16%. Broadly, top line growth consisted of volume up +14% and price/mix up +9%. EBIT of US$182.5m was up in line with revenue at +23%, with margin softer by -20bps at 28.7% due to higher production and distribution costs.
• Segment revenue was up +18% to US$144.4m, driven by strong performance in Australia. Price/mix growth in Australia and New Zealand contributed +9% to top line growth, whilst segment volume growth contributed +11%. EBIT was up +15% to US$44.5m, with margin softer -90bps at 30.8% due to higher production & distribution costs and higher SG&A expenses.
• Segment revenue was up +24% to US$123.5m, driven by fibre cement and fibre gypsum net sales growth of +40% and +20%, respectively. Price/mix contributed +8% to top line growth due to the shift to higher value mix. Adjusted EBIT of US$16.7m was up +50% on pcp with EBIT margin up +250bps to 13.6%. Margin was assisted by lower SG&A expenses.

Company Profile 

James Hardie Industries Plc (JHX) manufactures building products for new home construction and remodeling. JHX’s products include fibre cement siding, backer board, and pipe. The company operates in the US, Australia and New Zealand.

(Source: BanyanTree)

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.