Category: Property

Investment Thesis:

• GMG’s high-quality investment portfolio which is globally diversified and gives exposure to developed and emerging markets
• Strong property fundamentals enabling valuation uplifts 
• With more than 50% of earnings derived offshore GMG is expected to benefit from FX translation and a prolonged period of lower rates
• Transitioning to longer and larger projects in development
• Strong performances in Partnerships such as with Cornerstone
• GMG’s solid balance sheet provide firepower and access to expertise to move on opportunities in key gateway cities with demand for logistics space (and supply constraints) and diversify risk by partnering (i.e. growth in funding its development pipeline) or co-investment in its funds and or make accretive acquisition opportunities
• Expectations of continual and prolonged lower interest rate environment globally (albeit potential rate hikes in the US) should benefit GMG’s three key segments in Investments, Development and Management

Key Risks:

• Any negative changes to cap rates, net property income
• Any changes to interest rates/credit markets
• Any development issues such as delays
• Adverse movements in multiple currencies for GMG such as BRL, USD, EUR, JPY, NZD, HKD and GBP
• Any downward revaluations
• Poor execution of M&A or development pipeline
• Key man risk in CEO Greg Goodman

Key highlights:

• GMG delivered operating profit $1,219.4m, up +15.0% over the pcp, and operating EPS of 65.6 cents, up +14.1%. DPS of 30.0cps was in line with expectations.
• Management provided solid FY22 earnings guidance stating: “FY22 forecast operating EPS is 72.2cps, up +10% on FY21. Forecast full year distribution for the coming year is 30cps”.
• The Group is well positioned to maintain WIP of around $10bn throughout FY22, with multi-storey developments remaining a meaningful contributor.
• Customer demand in our markets is also translating into high occupancy, rental growth and strong investment returns which should see AUM grow to in excess $65bn and support the performance of our management business.
• GMG saw strong uplift in revaluations of $5.8bn driving growth in total AUM to $57.9bn (up +12%). GMG expects development WIP will organically grow AUM (which management expects to exceed $65bn in FY22).
• GMG’s portfolio had high occupancy at 98.1%, weighted average lease expiry of 4.5 years, and like-for-like NPI growth at 3.2%. 3.9m sqm of leasing equated to $517.1m of annual rental property income. 

Company Description: 

Goodman Group Ltd (GMG) own, manage, develop industrial, warehouse and business park property in Australia, Europe, Asia and Americas. GMG actively seeks to recycle capital with development properties providing stock for ownership by either the trust or third-party managed funds, with fees generated at each stage of the process.

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.

 a diversified portfolio of 86 pub and bottle-shop properties on long leases to Australia’s largest pub and drinks operator. All properties are leased to Australia’s largest pub operator, Endeavour Group. The tenant, Endeavour, was spun out of Australia’s giant supermarket chain Woolworths.

A feature of the leases are their long terms, with most leases starting in November 2003 for a 25-year initial term, with the tenant also having four 10-year options to renew. …ALE benefits from these investments via increased valuations and from market rent reviews in 2018 and 2028. The 2018 rent reviews were subject to a cap and floor of 10% but the 2028 reviews are uncapped. In other years, ALE receives contracted rents that grow in accordance with the consumer price index. Most leases are also on attractive triple-net terms, where the tenant is responsible for most operating costs (other Queensland land tax) and capital expenditures.

Endeavour’s hotel and bottle-shop earnings have grown significantly above the consumer price index since November 2003. Along with other characteristics, independent valuers typically assess market rents at 35%-45% of EBITDA (before rent). 

Company’s Future outlook

We expect strong continued earnings growth at its properties, supported by strong population growth and our view that authorities would have a bias toward existing operators in approving liquor and gaming licences, making it more difficult for new entrants.

There is a high degree of uncertainty about the outcome of the 2028 reviews as they will depend on things like interest rates and the regulatory environment at the time. Although our base case is for a positive uplift in rents at the 2028 reviews, there are several risks that could negatively affect pub earnings, including adverse changes in gambling and liquor regulation.

Financial Strength

ALE Property Group is in solid financial health. Credit metrics appear aggressive-net debt/EBITDA over 9 times and interest cover of just 2.4 times-but we are comfortable giving highly defensive revenue under long-term leases to a strong tenant. ALE has been reducing its gearing (net debt/total assets less cash) from 65.2% at the end of fiscal 2008 to 36% in June 2021, well below covenant limit of 65%. Our base case assumes ALE maintains gearing at around current levels. Cap rate compression combined with CPI-linked rental increases has seen fair values of properties increase significantly from fiscal 2014. ALE has no major debt maturities until August 2022 (AUD 150 million), followed by November 2023 (AUD 150 million not including CPI increases). Of net debt, 100% is hedged until November 2025 to mitigate against interest-rate risk. ALE has an investment-grade credit rating of Baa2 (negative outlook) from Moody’s.

Bulls Say

• The REIT enjoys stable income underpinned by long term inflation-linked leases with a strong tenant.
• There is major potential upside to rental income from capped market rent reviews currently underway and uncapped market rent reviews in 2028. 
• Astute internal management has a good record of creating shareholder value.

Company Profile

ALE Property Group is an internally managed Australian real estate investment trust with a portfolio of 86 freehold pubs across Australia. It is a stapled entity comprising one trust and a company that acts as a responsible entity. The portfolio is valued at more than AUD 1 billion: 48% in Victoria, 31% in Queensland, 14% in New South Wales, and small exposures to South Australia and Western Australia. All properties are leased to Australia’s largest pub operator, Endeavour Group.

 (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

• WPR currently trade in line with its NTA and our valuations.
• Solid distribution yield
• A quality $2.94 billion asset portfolio (427 properties, 74% metro, 26% regional) with a Weighted Average Lease Expiry (WALE) of 10.5 years and two lease expiries before 2026 (0.6 percent of income) and annual increases of 3.0 percent bodes well for valuation uplift.
• Due to high barrier to entry it becomes difficult to replicate assets portfolio.
• Solid capital management with gearing that allows for future acquisitions.
• Potential property network expansion through earnings accretive acquisitions.
• Waypoint REIT leases to Viva Energy, which has an Alliance Agreement/Site Agreement with Coles Express and a Shell brand Licence Agreement.
• Majority of assets on triple net leases, where tenant is responsible for all property outgoings.

Key Risks

• Tenant concentration risk.
• The alliance agreement with Coles Express has been terminated.
• Other branded service stations compete.
• The rising cost of fuel is putting a strain on tenants.
• The portfolio’s rental income has been reduced due to the sale of properties.
• Excess supply of service stations has the potential to affect portfolio valuations and other property metrics.

1H21 Results Highlights 

• Statutory net profit of $251.9 million, up +83.9 percent.
• Distributable earnings of $61.3m up 6.1 percent. The Translate to distributable earnings per security 7.81 percent, up +5.4%.
• Net tangible assets security as of June 2021 was $2.75, up $10.4% since December 2020.
• WPR saw a $189.8 million increase in gross revaluation in 1H21, with the portfolio weighted average capitalisation rate falling 19 basis points to 5.37 percent. WPR has sold 37 non-core assets for a total of $132.0 million, representing a +10.8 percent premium over WPR’s current carrying value.
• WPR’s gearing at 1H21 end was +27.3% (or pro forma gearing of 28.7%) and remains at the bottom end of WPR’s 30-40% target range.

Company Profile 

Waypoint REIT Ltd (WPR) is an Australian listed REIT that owns a portfolio of service stations across all of Australia’s states and territories. It currently owns 469 service stations in its portfolio. Its service stations are leased on a long term basis to Viva Energy Australia who has licence and brand agreements with Shell and Coles Express. Average value by property is ~ A$2.94bn.

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 

• Stable and sustainable distribution yield.
• Trades on a ~20.7% premium to NTA.
• Strong and experienced management team.
• WES stake in BWP (24.75%) provides security against risk of non-renewal of leases by Bunnings. 
• High quality property portfolio with long weighted average lease expiry, strong lease covenants, and high occupancy.
• Low interest rate environment is encouraging for the housing industry and hardware sales however any sudden increase in interest rates provides risk to both revenue and debt financing costs. 
• Solid balance sheet with low gearing levels. 
• Risk of poor execution in redevelopment of assets vacated by Bunnings to other uses.

Key Risks

We see the following key risks to our investment thesis:

• Any slowdown in demand and net absorption for hardware space.
• Persistent lower inflation (and deflation) affecting retailers.
• Economic conditions affect property fundamentals such as values (cap rates and rental growth), vacancies, retail activity (and hence demand for space at big-box retail sites). 
• Risk of non-renewal of leases by Bunnings Group. 

BWP Portfolio key Highlights

 (1) Occupancy and Rent Reviews: the portfolio was 97.8% leased. According to management, “the rent payable for each leased property is increased annually, either by a fixed percentage or by the CPI, except when a property is due for a market review… During the year, 86 leases in the portfolio had annual fixed or CPI increases, resulting in an average increase of 1.6% in the annual rent for these properties. Sixteen market rent reviews (including 13 Bunnings Warehouse properties) were finalised during the year, with rents broadly in line with the market. The market rent reviews that were due for two Bunnings Warehouses during the year ended 30 June 2020 and 11 during the year ended 30 June 2021 are still being negotiated or are being determined by an independent valuer and remain unresolved”. 

(2) Property portfolio revaluations: BWP’s portfolio value increased $151.9m to $2,636.1m in FY21, driven by capex of $16.8m and revaluation gains of $149.2m, less net proceeds from divestments of $15.8m. Net revaluation gain was driven by growth in rental income and an average decrease in capitalisation rates across the portfolio in FY21. BWP’s weighted average capitalisation rate for the portfolio was 5.65% (versus 5.84% in December 2020 and 6.08% in June 2020). 

(3) Acquisitions and divestments: BWP made no acquisitions in FY21 but made several offers, with management highlighting “the Trust actively continues to look for value creating opportunities”. BWP also divested its Underwood property in Queensland for $16.0m to an unrelated third party in May 2021. BWP has also entered into an agreement to divest its Mindarie property in Western Australia for $14.5m to an unrelated third party with settlement expected on 30 July 2021. 

(4) Developments: in FY21, BWP completed the expansion of the Croydon Bunnings Warehouse, Victoria for $4.0m, which drove an annual rental increase of ~$0.2m. BWP also expanded the Port Melbourne Bunnings Warehouse, Victoria, for $6.6m, driving an annual rental increase of ~$0.4m.

Company Description  

BWP Trust (BWP) is a real estate investment trust focused on operating, owning, and divestments and acquisitions of large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Ltd (‘Bunnings’). Bunnings is the leading retailer of home improvement products in Australia and New Zealand and is a major supplier to builders and trades people in the housing industry. BWP is managed by an external responsible entity, BWP Management Ltd who is paid an annual fee based on the gross assets of BWP. Both Bunnings and BWP Management Ltd are wholly-owned subsidiaries of Wesfarmers (WES), one of Australia’s largest listed companies. WES owns ~24.75% of BWP. Currently, BWP is the largest owner of Bunnings Warehouse sites, with a portfolio of ~80 stores. Eight properties have adjacent retail showrooms leases to other retailers.  BWP also owns one stand-alone showroom property. The assets have a current value of ~$2.49bnmillion, WALE of ~4 to 5 years, 97.5% occupancy rate.

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.

As expected, Pexa’s revenue grew by 42% in fiscal 2021, reflecting the increase in usage of Pexa’s platform and the strong growth in property transactions. Property transactions have been boosted by coronavirus-related interest rate cuts in 2020, and subsequent mortgage refinancing activity, and the deferral of property sales from fiscal 2020 due to COVID-19 restrictions. Pexa’s strong revenue growth combined with operating leverage to drive a 114% increase in EBITDA and an expansion in the EBITDA margin to 46% from 29% in the prior year. 

We believe that Pexa’s key growth opportunity will come from international expansion, with the United Kingdom most attractive to Pexa. We expect Pexa’s Australian business to be a “cash cow” on account of its wide economic moat, effective monopoly, low capital intensity, and relatively high margins. This should generate cash for sustainable dividends and enable deleveraging of the balance sheet. Although the net debt/ EBITDA ratio of around 4 is relatively high in comparison with other ASX-listed technology companies, we think it’s reasonable and sustainable considering the infrastructure like nature of the company.

Company Profile

Pexa is the first electronic conveyancing platform for real estate in Australia and derives revenues by charging fees to facilitate real estate transactions over its network. The emergence of electronic conveyancing creates a number of efficiencies and replaces the historical labour-intensive process which was vulnerable to errors. Having achieved dominance of the Australian electronic conveyancing market, Pexa is looking to expand overseas and replicate its success in international locations. The company was founded in 2010 by a group of Australian state governments with Australia’s “big four” banks beginning to transact on the platform shortly after.

 (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 

• Engineering and Support The business sale process is currently underway, removing one downside risk to the stock. 
• The business sale process is currently underway, removing one downside risk to the stock.  However, as development progresses through FY23, gearing is expected to rise to 20%.
• Robust development outlook, with demand for both commercial and residential, particularly with a high level of apartment pre-sales; 
• The outlook for new infrastructure projects to be tendered in Australia over the next two years remains favourable.
• A new management team will almost certainly bring a new perspective and strategy.
• In a difficult trading environment, the proposed cost out programme of $160 million should be supported by earnings.
• Valuation appears to be undemanding.  

Key Risks

Our investment thesis is vulnerable to the following key risks:

• Additional provisions for existing problem projects.
• New projects are overpriced in terms of risk.
• Dividends should be reduced. 
• Interest rates have risen unexpectedly.
• The number of apartments that have gone into default has increased.
• Any delays or execution issues in development and construction that affect margin.
• Any net outflows from the company’s investment management division.

What sparked our interest

• LLC will hold a Strategy Update on August 30th, but management has already announced some details, including $160 million in cost out, which equates to 17.4 percent of FY21 earnings.
• A difficult FY22 is ahead, with the outlook shocking the market.
• LLC will now book profits on development projects as they are delivered (rather than upfront), shifting the profit profile to the back end.
• LLC is still aiming for $8 billion in development output by FY24, with a ROIC of 10-13 percent. LLC will see a significant increase in earnings if timing targets are met and macroeconomic conditions remain “normal.”

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.

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.

• Cap rates and asset valuations need to be adjusted for negative domestic economic data points around the consumer, which is a risk for VCX.
• High-quality property portfolio (high occupancy, consistent rental growth, etc.) with portfolio repositioning that makes it resilient to a declining retail sales environment.
• A strong development pipeline is in place to fuel growth at a reasonable starting yield and IRR.
• The retail climate is challenging, and is anticipated to stay so for the next 12 months, as households continue to be hampered by high debt levels and a lack of wage growth, despite stable unemployment in the eastern states.
• Strong specialty growth across retail categories, particularly Luxury retailers (+30.2 percent in the year ending December 2019).

Key Risks

• The Corona virus has an impact on consumer attitude and retail outlets, which has an impact on VCX tenants.
• Interest rate hikes have a negative impact on the company’s cost of debt and consumer spending in the retail industry.
• Increased unemployment leads to lower consumer retail spending, which has an impact on rental growth and property valuations. Inability to mitigate consequences that arise from weak retail environment.
• Property fundamentals are weaker than projected.
• Tenancy risk/retailer failures result in more vacancies across the asset portfolio (e.g., Dick Smith) and a negative impact on profitability.
• Delays in the development timetable and project cost overruns.
• Any drop in interest in bond-proxy stocks among investors.

FY21 Results Highlights

Funds from operations (FFO) increased to $558.8 million, or 12.28 cents per share, from $520.3 million, or 13.66 cents per share, in FY20, owing to significant Net Property Income (NPI) growth of +8.7% to $743.4 million. The statutory net loss after tax was $258.0 million (compared to $1,801.0 million in FY20) and included a $642.7 million non-cash net property valuation loss. For 2H21, a final DPS of 6.6cps was declared. “4.1 cents attributed to Vicinity’s typical earnings in 2H21 and 2.5 cents attributable to other one-off events recognised over the year,” including “reversal of waivers and allowances recognised in FY20, lower net interest costs,” made up the 6.6 cents.

Due to higher than expected NPI in June 2021, the FY21 dividend of 10.0cps equalled to a payout ratio of 93.7 percent of Adjusted FFO (AFFO), which was an improvement from 7.7cps, payout ratio 69.3 percent in FY20, but somewhat below the goal range of 95 percent -100 percent. VCX’s balance sheet remained robust, with a low gearing of 23.8 percent, investment-grade credit ratings of A/stable (S&P) and A2/stable (Moody’s), $2.4 billion in liquidity, and no debt maturing until FY23. The weighted average debt term of VCX is 4.4 years, while the drawn debt maturity is 5.8 years. 

Company Description  

Vicinity Centres Ltd (VCX) is an ASX-listed real estate investment trust (REIT) with a strong retail portfolio and a well-integrated asset management platform. Vicinity Centres owns or has an interest in the following prominent retail assets: Chatswood Chase (NSW), Chad stone Shopping Centre (VIC), DFO South Wharf (VIC), Queens Plaza (QLD), Emporium Melbourne (VIC), and DFO Home Bush (VIC) (NSW). The merging of Federation Centres and Novion Property Group resulted in VCX.

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.

• Diversified with Funds Management business generating income.
• Balance sheet strength with gearing ratio at 24.5%, well below target range of 25-35%.
• Strong tenant demand for the GPT east coast assets.
• Conducting a buyback of up 5% of issued capital.

Key Risks

• Breach of debt covenants.
• Inability to repay debt maturities as they fall due.
• Deterioration in property fundamentals, especially delays with developments.
• Environment of expected interest rate hikes.
• Downward asset revaluations.
• Retailer bankruptcies and rising vacancies.
• Outflow of funds in the Funds Management business reducing GPT’s income.
• Tenant defaults as economic landscape changes.

1H21 results summary

NPAT of $760.5mvsnet loss of $520.4m in pcp million), with investment property valuation increases of +3.3% ($471.7m) with portfolio WACR firmed +10bps to 4.85%. FFO of $302.3m (+23.6%) resulting in FFO per security of 15.64 cents, an increase of +24.6%, reflecting the improved performance and the reduction in securities from the on-market buy-back. Total 12-monthreturn was 10.2%vs-0.1% in pcp amid investment property revaluation gains driving an increase in NTA per stapled security of +29% to $5.86. Operating cash flow increased +41.6% over PCP to $289m and FCF increased +40.2% to $255.1m. Completed 32 Smith and Queen & Collins Office developments valued at $ 780m, and 4 Logistics developments on track to complete in 2 H21 with a combined expected end value of $170m.

Company Description  

GPT Group (GPT) owns and manages a portfolio of high-quality Australian property assets; these include Office, Business Parks and Prime Shopping Centres. Whilst the core business is focused around the Retail, Office and Logistics, it also has a Funds Management (FM) business that generates income for the company through funds management, property management and development management fees. GPT’s FM business has the following funds, GPT Wholesale Office Fund (GWOF – A$6.1b) launched in July 2006, GPT Wholesale Shopping Centre Fund (GWSCF – A$3.9b) launched in March 2007 and GPT Metro Office fund (GMF – A$400m) launched in 2014.

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.

• Potential positive regulatory changes to childcare subsidies (i.e. increase in subsidies for childcare services from 28hours (or 3 days) to 4 days) and incentives for parents to work.
• Increasing macro trends of increased female labour participation rates as a key driver for ELC demand.
• Potential upside from its development pipeline in childcare centres.
• Solid balance sheet with low gearing.  
• Strong and experienced management team.
• Strong tenant profile.

Key Risks

• Property portfolio fundamentals risks. Assets in the portfolio are subject to risks from deterioration in the property fundamentals such as cap rates, rents received from tenants and rental growth, expense risks, net asset values, occupancy rates, tenancy risk and costs, weighted average lease expiry. Deteriorating economic and demographic trends (such as lower population growth or lower GDP growth) will impact assets.
• Development risks. Poor execution or delays of development or redevelopment of existing properties may affect the rental income and value of assets of the Company.
• Adverse interest rate movements affect bond-proxy stocks. Deterioration in credit markets may result in changes to the availability of borrowings, impact gearing levels and debt covenants and the interest rates charged by lenders resulting in the Company borrowing at higher interest rates, thereby affecting distributions.
• Management performance risks. The Company relies on the expertise of managers to manage assets, asset recycling (acquisitions and divestments), and to execute the strategy.

FY21 Results Highlights

Statutory net profit $165.4m, up 116%. Net operating profit (distributable income) of $51.9m, up 18.5%. Earnings per security of 15.2 cents, up 4.5%.  Distributions per security of 14.8 cents, up +6%. Total Assets of $1,151.5m, up +14%. Net Asset Value (NAV) per security of $2.56, up +15%. Gearing 19.9%, increased from 14.8% at FY20.  100% of contracted rent was collected in FY21. ARF guided to FY22 DPS guidance of 15.8 cents per security, which implies growth of +6.8% on FY21.

Company Description  

Arena REIT (ARF) owns develops and manages a portfolio of childcare properties and healthcare facilities. 

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.