ASX code: FET
Share price: $2.39
Industry: Real Estate
Forecast FY2017 Distribution: 14.2c
After a golden five-year period for listed AREITs, the opening of FY2017 has proved to be a much more difficult environment for the commercial property sector. This hasn’t necessarily reflected stock specific issues, rather just the elevated valuations apparent in listed property groups as at 30 June. What has changed in recent times is the yields on 10-year government bonds, commonly referred to as the ‘risk-free rate.’
Specifically, bond yields have surged higher from artificially depressed levels. This has had a negative flow on effect on almost all REITs and other so-called bond proxies, with the broader sector selling off by more than 12% over the past few months. In our view, this has brought some more value back into the sector. Childcare focused REIT Folkestone Education Trust (FET) hasn’t escaped the carnage, receding some 18 per cent since its recent peak to levels we consider to be more interesting.
Recent results have been strong, with the group reporting a 16% increase in distributable income in FY16 to $34.5m. FET’s net tangible asset (NTA) backing also increased by 17.6% to $2.14. Given the more conservative capitalisation rate used to calculate FET’s NTA (when compared with recent transactional evidence), we believe there is meaningful upside to the groups asset backing over the next 12 to 24 months.
In our view, FET is well positioned with a portfolio whose metrics impress. FET’s weighted average lease expiry (WALE) is lengthy at 8.2 years while the portfolio occupancy is strong at 99.5 per cent. We are also attracted to the triple net leases that FET has in place, which effectively means that tenants cover all outgoings.
Positively, FET has a strong balance sheet with a relatively low level of gearing. FET’s gearing ratio sits at just 26.6 per cent. In turn, this allows considerable scope for value adding development and targeted acquisitive activity should the right opportunities become apparent over the coming year.
Another positive feature of the trust is the elevated frequency of distribution. FET pays out a healthy distribution on a quarterly basis. Management expects to deliver a distribution of 14.2 cents per security for FY2017, which equates to an attractive yield of about 6 per cent. As such, we see FET as offering a sound mix of steady growth and regular income.
Given the Group has a high-quality management team, sound future prospects and a solid yield, we believe FET presents as a worthy research target for investors with a reasonable time horizon.
Originally published in The Australian on Tuesday 8th November 2016