Category: Property

GPT has some major developments in the pipeline, particularly in the office and industrial space, and as these complete, we expect rental income to become a larger portion of revenue over time. Its office portfolio includes stakes in Sydney’s Australia Square and Governor Phillip Tower, Brisbane’s One One One Eagle St and the neighbouring Riverside Centre, and numerous properties in and around Collins St in Melbourne’s CBD. Retail property remains a large exposure, making up about 40% of GPT’s directly held property and one third of its funds management assets. 

GPT has not been acquiring retail properties lately, limiting investments to refurbishments or redevelopments. The group has several development opportunities, with the most significant being an as yet uncommitted redevelopment of Darling Park and Cockle Bay, which we expect will create an entirely new precinct above Sydney’s western distributor. GPT has moderate exposure to industrial property, and launched its first industrial property funds management vehicle in 2020. Ownership of industrial property has been an increased focus.

Financial Strength 

GPT is in solid financial health, with gearing (net debt to assets) of 24.5%, as at June 30, 2021. This is slightly below the group’s targeted range of 25%-35%. We expected gearing would rise based on further acquisitions and development, however, its a possibility that GPT will save its ammunition until the outlook improves further. Gearing is also likely to rise due to further devaluations in the office and retail portfolio. GPT is likely to be able to rollover the debt, given its interest cover ratio was roughly eight times, based on the June 2021 accounts. The weighted average debt maturity is 7.4 years, and two thirds of debt is hedged, reducing interest-rate risk. The weighted average cost of debt of 2.7% which fell from 3.1% in December 2020. 

GPT Group made a decent comeback in the first half of fiscal 2021, driven by a recovery in rental collections, leasing activity, and retail sales. Funds from operations per security grew 25% on pcp, to AUD 15.6 cents, in line with our expectations. GPT announced an interim dividend of AUD 13.3 cents per share which is on track to meet our full year estimate of AUD 25 cents per share. GPT bought back 32 million securities at an average price of AUD 4.54, which was moderately below the market price, and well below our fair value estimate. 

Our cost of capital assumptions for GPT are unchanged but we factor in savings from a remarkably low average cost of debt of 2.7% that is locked in for more than seven years. Our long-term thesis remains intact with expectations that GPT will recover to prepandemic levels in fiscal 2022, delivering an FFO per security of AUD 32 cents per share. GPT’s prime office portfolio is well placed to capture employers looking to make upgrades to prime-grade offices better accommodated to flexible working. 

Bulls Say’s

• GPT has several development plans that are near shovel-ready. Unlike rivals, GPT’s strong balance sheet means it has the flexibility to proceed with these projects when it chooses to.
• GPT’s office, industrial and funds management businesses diversify income sources, meaning it should see the benefits of an eventual post-COVID-19 recovery.
• Demand for quality real estate remains from the likes of pension funds, sovereign wealth funds and other offshore investors, which should drive buying in the direct property market and limit valuation falls.

Company Profile 

GPT Group was listed in 1971 and is Australia’s oldest listed property trust. The business strategy is not particularly differentiated from peers, other than through its particularly conservative gearing and modest emphasis on development activity. The portfolio weighting to industrial is a major growth area for the firm, but is still minor at about 20% of total revenue. GPT remains dominated by retail malls that generate about a third of its revenue, and another quarter from office.

(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.

Pubs are primarily in Queensland, leased almost exclusively to Queensland Venue Co, a joint venture between subsidiaries of supermarket giant Coles and Australian Venue Company, or AVC. A key attraction of Hotel Property is favourable lease terms that provide for predictable above-inflation rental income from long-term leases.HPI also benefits from low interest rates, population growth and restrictive liquor licensing laws in Queensland. Close to 90% of Hotel Property’s freehold properties are in Queensland, predominantly pubs that are leased to QVC. The joint venture leases generate about 90% of Hotel Property’s rental income. This risk has been substantially alleviated due renewal of most leases for an extended 10 to 15-year period. Key near term risk is whether the corona virus threatens the viability of the tenant, given AVC is highly geared. Longer term risks include a potential changes in liquor and gambling laws making pub licences less valuable 

Hotel Property Investments, or HPI, reported a solid fiscal 2021 result. Adjusted funds from operations rose 7% to AUD 32.5 million on 2.5% like-for-like rental increases and acquisitions. Weighted average lease expiry remains long at 10.8 years. This suggests revenue is highly defensive, but have lingering concerns about the financial health of the key tenants, Queensland Venue Company and Australian Venue Company, with ongoing threat of corona virus lockdowns and social distancing requirements. Net tangible assets increased 10% to AUD 3.30 per security as the average capitalisation rate tightened 20 basis points to 5.9% amid the ongoing low interest rate environment. HPI is in reasonable financial health. Debt to assets was 38% in fiscal 2021, towards the bottom of management’s 35% to 45% target range

HPI made nine acquisitions in regional Queensland in fiscal 2021, worth AUD 96 million. We like the strategy of teaming up with the key tenant to take over pubs and separate the operations from the property, as we think supporting the tenant with capital contributions to aid its growth strategy will lead to better rental yields and longer lease terms than buying pub properties on its own. The main drawbacks are that acquisitions have been of lower quality than its existing pubs and exposure to QVC/AVC increases. Of HPI’s 54 properties, 49 are leased to QVC/AVC.

Financial strength

Financial Strength Hotel Property is in sound financial health, with gearing (debt less cash/total assets less cash) of about 38% as at June 2021, well below covenant gearing of 60% and slightly below its own target gearing of between 35% and 45%. It’s also comfortably meeting its interest cover covenant of 1.5 times, with current interest cover (earnings before interest and tax/interest expense) of above 3.9 times. Debt maturity profile is fairly long at 5.7 years. The recent precipitous fall in interest rates should alleviate interest costs because about 40% of its debt is on floating rates.

        Bulls Says

• Hotel Property Investments’ distribution yield is higher than most Australian REIT peers, supported by most contracted annual rental increases averaging the lesser of 2 times CPI or 4%.
• Rental income is underpinned by long lease terms.
• Liquor and most gaming licenses are retained by Hotel Property when leases expire. This is a contingent asset that should be a draw-card for potential pub tenants in the absence of adverse regulatory changes.

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.

• 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

We see the following key risks to our investment thesis:

• 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.

Portfolio highlights.

 $5.6bn property portfolio, up from $3.6bn, driven by $1.4bn of property acquisitions and $523m net property revaluation uplift. NTA of $5.22 per security, is a +16.8% increase from FY20. The acquisitions are broken down as follows:

• $638m of Retail: 50% interest in David Jones, Sydney CBD flagship store with a 20-year triple net lease to David Jones; bp NZ Portfolio of 70 convenience retail properties on triple net leases to bp Oil New Zealand for 20-year WALE; 33.3% interest in Myer Bourke Street Mall, Melbourne flagship store with a 10-year net lease to Myer; Bunnings property to be developed in Caboolture, Brisbane and established Bunnings property in Baldivis Perth; 50% interest in The Parap Tavern, Darwin and Terrey Hills Tavern, Sydney, leased to Endeavour Group on initial 15-year triple net leases and 100% interest in Ampol travel centre in Redbank Plains, Brisbane.   
• ( ii) $361m of Social Infrastructure: Telco Exchange property at 76-78 Pitt Street, Sydney with 10-year triple net lease to Telstra and 50% interest in life sciences property leased to Australian Red Cross in Sydney, with 9.6-year lease remaining. 
• $311m of Office: 50% interests in Commonwealth Government properties, comprising A-grade office building in Tuggeranong, Canberra, leased to Services Australia and two A-grade office towers in Box Hill and Albury, Victoria majority leased to Australian Tax Office.
• $83m of Industrial & Logistics: 100% interest in prime industrial property in Carole Park, Brisbane leased to Simon National Carriers on a 15-year net lease.

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).

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.

• Strong property fundamentals which should see valuation uplifts. 
• With more than 50% of earnings derived offshore we expect GMG 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 Cornerstone.
• GMG’s solid balance sheet providing 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

We see the following key risks to our investment thesis:

• 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.

By segments

 (1) Property investment: – GMG’s portfolio retained strong property fundamentals driven by “the prolonged impacts of the global pandemic [which] continue to accelerate consumers’ propensity to shift to online shopping. Logistics and warehousing has provided critical infrastructure to enable distribution of essential goods to time-sensitive consumers through this period”. 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. 

(2) Development: – GMG was able to grow WIP to $10.6bn, up +63% on FY20 (across 73 projects with a forecast yield on cost of 6.7%). According to management, 81% of current WIP is being undertaken within Partnerships and GMG commenced $6.6bn in new developments with 57% committed. Management noted “metrics across the workbook remain robust as we maintain our focus on infill target markets, resulting in high levels of pre-commitment at 70% with a 14-year WALE”. 

(3) Management: – 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). Weighted average cap rate (WACR) compressed 55bps to 4.3% during FY21. Average Partnership gearing is 17.5%. Average total return in the Partnerships of 17.7% driven by strong development performance. 

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.

• 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

We see the following key risks to our investment thesis:

• 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.

Property Portfolio Highlights

During FY21, CQE increased its portfolio weighting to social infrastructure assets, diversifying from a pure childcare focus. Key highlights (relative to FY20): 

(1) CQE saw revaluation uplift of $119.4m, up +11.1% net of capex and on a passing yield of 5.6%. 

(2) Portfolio WALE of 15.2 years, increased from 12.7 years. The portfolio was 100% occupied and lease expiries within the next five years are at 3.4% of rental income. 

(3) The majority of leases (73.2%) are now on fixed rent reviews up from 53.6% at FY20, resulting in a forecast WARR of 2.9%. 

(4) Social Infrastructure Acquisitions: CQE acquired 

• Mater Health corporate headquarters and training facilities for $122.5m (passing yield of 4.84%, underpinned by a new 10-year lease to Mater and fixed annual rental increases of 3.0%). Mater, Queensland’s largest Catholic, not-for-profit health provider, with net assets of over $1bn; and 
• South Australian Emergency Services Command Centre and adjacent car park (in construction), for $80m (passing yield of 4.8%). On completion, the asset will be leased to the South Australian Government (85% of property’s total income) and occupied by four Government emergency services agencies on a 15-year lease, with fixed 2.5% annual rent escalations and two 5-year options.

 (5) Childcare Portfolio: 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). CQE divested “non-core assets to recycle capital into properties with more favourable property fundamentals to improve the quality of the portfolio”; divesting 44 properties for $85.3m (including remaining 20 NZ assets), on average yield of 5.9% resulting in a 5.7% premium to book value. These divestments encompass smaller centres (average of 67 places), short WALE (average 6.6 years) and lower socio-economic locations. CQE also completed ten developments with $69.7m completion value and a yield on cost of 6.1%. CQE’s childcare development pipeline: 14 projects, of which 9 are expected to be completed during FY22.

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.

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.

• Triple net leases to ALH.
• High quality property portfolio with positive fundamentals and supportive demographics.
• Potential upside as LEP’s assets have significant land value (95 hectares) and LEP continues to explore development opportunities with ALH.
• Long term leases with average lease term of >8 years (and positive lease terms).
• 100% occupancy rate as all properties are leased to ALH.
• Solid distribution yield.
• Potential rental growth from upcoming rental reviews in 2018.
• Demand for pub property investment remains strong

Key Risks

We see the following key risks to investment thesis:

• Interest rate levels may rise or deterioration in credit/capital markets and thus reduced profitability and distributions
• Any slowdown in demand and net absorption for retail space.
• Any deterioration in property fundamentals especially delays with developments, declining asset values, bankruptcies and rising vacancies.
• Declines in property valuations.
• Rental rates post reviews may be unfavorable.
• Weakness in rental demand – Slow wage growth and on the back of rising costs of living.
• LEP is exposed to single tenant risk from ALH via any default on rental payments. ALH is part of Endeavour Group, which is likely to be demerged in CY20. Whilst default remains unlikely, single tenant risk is higher than previous levels.
• Adverse regulatory changes on liquor or gaming licenses could impact the profitability of tenants (lockout laws repeals may not be as effective as desired).
• Distribution has been less than distributable profit, and management has had to finance the difference using cash reserves and undrawn debt facilities. However, net gearing is at historically low levels.
• REITs as bond proxy stocks are impacted by expected cash rate hikes.

Property portfolio highlights

(1) divestment of non-core assets. LEP divested $72.86m of non-core assets, at a yield of 4.4% and 24.2% premium to book value. Proceeds were used to reduce net debt and partially restructure LEP’s interest rate swap book. LEP’s asset at Tudor Inn, Cheltenham Victoria and Royal Exchange Hotel, Toowong Queensland are currently for sale by tender and auction respectively. 

(2) Valuation uplift. 36 properties (44% of the portfolio) were independently valued, and Directors’ valuations were undertaken for the remaining 44 properties (56%), and resulted in an uplift of $89.71m, or 7.45%, since December 2020, to total value of $1,294.261m (on 4.59% adopted passing yield versus 4.94% in December 2020).

Company Description  

ALE Property Group (LEP) is the owner of Australia’s largest portfolio of freehold pub properties. Established in November 2003, ALE owns a portfolio of 86 pub properties across Australia, with a value of ~$1,172.1m (average value of $12.6m on weighted average cap rate of 5.09%). All the properties are leased to Australian Leisure and Hospitality Group Limited (ALH). ALH is Australia’s largest pub operator with ~330 licensed venues, ~550 liquor outlets and ~1,900 short stay rooms.

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.

In the six months to June, the number of renters spending more than two-fifths (41%) of their income on rent had increased by 8 percentage points to 68 percent, with tenants in both capitals and regions failing to keep up with rising rents. A renter is considered to be in rental stress if they spend 30% or more of their income on rent the poll of 1500 families also indicated that more than three-quarters of Queensland renters (77%) and more than seven-tenths of NSW renters (72%) are now stressed.

Due to lower incomes, a greater proportion of women (75%) failed to make their rent payment, compared to only 60% of males. Women make only 86 percent of men’s typical salaries, according to the Australian Bureau of Statistics, and employed women aged 20 to 74 are nearly three times more likely than males to work part-time.

In the year to July, median rents for houses and apartments had risen by 7.5 percent across the country, the largest annual increase since 2008. Those who owned a home were less stressed than those who rented. Only two out of every five people (42%) spent more than 30% of their discretionary income on mortgage payments. 

Mortgage stress has been reduced thanks to resurgence in economic activity, extremely low interest rates, and the delay of loan repayments by some homeowners. According to a new Core Logic analysis, repaying a mortgage is now cheaper than paying rent on 36.3 percent of Australian residences, up from 33.9 percent in February last year before COVID-19.

 (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.

The booming Australian housing market is one of the factors supporting the CBA share price (and those of its competitors).

“Record low mortgage rates and the likelihood of interest rates remaining low for an extended period of time are fueling demand,” says Tim Lawless, research director at CoreLogic.

The rise in home prices has resulted in a significant increase in the mortgage balances held by Australian banks.

According to BankingDay, “lenders’ mortgage balances increased by 0.7 percent in June, compared to the previous month – the greatest level of monthly growth since 2010.”

According to APRA’s most recent monthly ADI statistics, Commonwealth Bank, National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp. (ASX: WBC) all outperformed the market in June, with mortgage balance growth of 0.9 percent.

In the long run, the lenders’ mortgage amount increased by 5.3 percent in the year to June 30, the quickest annual rate in three years.

The share price of CBA has likely risen in comparison to its major competitors over the last year, as CommBank has managed to grow its mortgage balance faster. The book of CommBank increased by 6.7 percent, compared to 1.6 percent for NAB and 2.3 percent for Westpac.

CBA’s stock price has risen 46 percent in the last year, greatly surpassing the S&P/ASX 200 Index’s increase of 26 percent (ASX: XJO). The CBA share price has continued to rise year to date, up 22 percent so far in 2021.

Company Profile 

The Commonwealth Bank was founded under the Commonwealth Bank Act in 1911 and commenced operations in 1912, empowered to conduct both savings and general banking business. Today, we’ve grown to a business with more than 800,000 shareholders and 52,000 people working in the Commonwealth Bank Group. We offer a full range of financial services to help all Australians build and manage their finances.

(Source: Fact Set)

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.

Pexa’s competitive advantages will be undermined somewhat following the introduction of interoperability in 2023. However, this will only impact its network effect, with customer switching costs likely to remain robust.

In turn, Pexa’s economic moat should enable relatively high investment returns and profit margins and the asset-light business model should enable strong cash generation and ultimately sustainable franked dividends.

Despite Pexa’s attractive attributes, the shares look expensive. Our base-case equity value of AUD 2.2 billion, or AUD 13.20 per share is 23% below the market price of AUD 17.15.

The strong market price is due to a combination of Pexa’s highly defensive annuity-style earnings coupled with record low interest rates, investor excitement about Pexa’s growth options, and recent real estate market strength. Link Group (ASX:LNK), which owns 43% of Pexa, offers cheaper exposure to Pexa.

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.