Insights from Adrian Ezquerro, Senior Analyst
Real estate investment trusts (REITs) and property companies are a key income source for many Australian investors, but they were sold off sharply in the August market correction.
Does that mean you should now avoid them?
REITs had a strong 2014, outperforming much of the market, but throughout this year they have drifted lower. The August sell-off merely accelerated that correction.
Figure 1. S&P/ASX 200 A-REIT Chart
Source. S&P Dow Jones Indices
Investors have been fretting about the impact on REITs of looming rate rises around the world in coming years.
Property stocks and REITs haven’t performed well in the past when interest rates go up. Their performance is closely linked to global Government bond yields. Those yields establish the ‘risk free rate’ against which investments like REITs are judged.
As the risk-free rate increases, yields demanded from REITs will rise. In turn that puts downward pressure on security prices.
With the US set to increase official interest rates, many investors are expecting REIT prices to fall.
Yet despite that big picture back drop, many Australian property companies and REITs have been performing solidly, and we still think there are opportunities for investors seeking both yield and value.
Here are six property stocks that we think are still attractive.
Stockland is the country’s largest diversified property group and one of our largest home builders. A strong housing market and improvements at its retail shopping centres is driving profit growth. The company’s distribution will rise slightly in 2016 to 24.5 cents per security, unfranked. That gives investors a strong 6.4 per cent yield. At $3.82, Stockland is trading below our forecast valuation of $4.11, which means current prices provide value and yield with the opportunity for growth.
APN Property Group (APD)
APN Property manages $2.2 billion worth of property, including its flagship APN AREIT Fund, Industria REIT and Generation Healthcare REIT. The company is benefiting from the growth in superannuation savings, and also renewed interest in income-producing assets such as property, which is driving strong inflows to APN’s funds. It recently handed down a strong full-year net profit and has a positive outlook for 2015. APN is forecast to distribute around 2 cents per security in 2016, giving a fully franked yield of 5.5 per cent. At 36 cents, the securities are also trading well below our forecast valuation of 49 cents.
Westfield Corporation (WFD)
Westfield Corporation is listed on the ASX, but most of its operations are in the US. (It is also exploring an offshore listing.) We think that provides a strong platform for growth, and means the company and unit holders should benefit from a falling $A. While Westfield Corporation’s dividend yield isn’t sky high, the prospect of a weakening $A means the company is an interesting option for income investors seeking international exposure and growth. Looking ahead, we expect income of about US26 cents per unit. At the current exchange rate of around US71 cents, that gives an $A forecast distribution of around 37 cents per unit. On a current price of $9.71, the yield looks to be 3.8 per cent. While that isn’t spectacular, that yield could rise with a falling $A. Westfield is also trading at fair value, which makes it a good option for income investors who want a hedge against a weakening $A.
Ardent Leisure (AAD)
Ardent Leisure owns some of Australia’s most high-profile theme parks and attractions, including Dreamworld and WhiteWater World. In March, Ardent’s securities crashed almost 30 per cent after it announced long-standing CEO, Greg Shaw, would be replaced. But it has long-term growth potential from its US assets, strong cash flow, and a solid distribution yield. The group will also benefit from the falling $A, which will boost tourism and increase its US earnings. The company is forecast to make a distribution of 14 cents per security in 2016, giving an indicative yield of 5.4 per cent. At $2.47, Ardent is trading below our forecast valuation of $2.59.
Aims Property Securities Fund (APW)
Aims Property Securities Fund invests in a diverse range of listed and unlisted property securities, including trusts, syndicates and REITs. APW’s holdings include positions in the Singapore-listed AIMS AMP Capital Industrial REIT and the ASX-listed Arena REIT. Management has restored its balance sheet post-GFC. APW’s strategy is now to make cornerstone investments in new AIMS managed investment vehicles (if in the best interests of unit holders), and to focus on ‘value-add’ type investment opportunities. We believe APW will pay out about 1 cent per unit over the coming 12 months, or around 0.25 cents per quarter, which on the current market price suggests an attractive yield approaching 7.5%, unfranked, and paid quarterly. With APW units trading at 13 cents, a significant discount to NTA of 19 cents, that makes it a solid choice for income investors.
Scentre Group (SCG)
Billionaire Frank Lowy split his Westfield Group last year. One business, Westfield Corporation, houses US assets. The other business, Scentre, manages, develops and owns interests in the Westfield shopping centres in Australia and New Zealand. Scentre has 47 shopping centres in Australia and New Zealand, including Hornsby in Sydney and Chermside in Brisbane, with 12,699 retail outlets. Scentre’s malls hold market-leading positions in premium locations. The portfolio includes 14 of Australia’s top 20 performing centres and is 99.5 per cent leased. The full-year pay out is forecast to be 20.9 cents per security, giving a solid dividend yield of 5.4 per cent. At $3.76, Scentre is trading slightly above our forecast value of $3.66. Scentre does face some challenges, but Westfield remains a powerful brand and strong operator of shopping malls, which along with a solid dividend yield, makes it a good option for income investors.
Prices and yield quoted correct at time of writing. Clime Asset Management owns all of the above companies on behalf of various mandates where it acts as an investment manager.
See other ASX companies with good yield attributes
Written by Clime, Dividend Detective is a weekly column in the Wealth Section of The Australian and highlights companies with good yield attributes.