Australia | Feb 19 2007
By Chris Shaw
With yield being a key attraction of listed property trusts, those trusts where yield growth is limited are less likely to outperform in relation to the sector. Commonwealth Property Office Fund (CPA) finds itself in such a position, as while earnings for the period of $72m were in line with market expectations, brokers see little on the horizon to allow for an increase in distributions.
Credit Suisse is forecasting no DPU growth in FY07, which is pretty much the consensus outlook given both UBS and JP Morgan see minimal if any increases in coming years. GSJB Were also points out any scope for further increases in valuation are unlikely given the group has re-valued almost its entire portfolio in the past six months.
UBS also sees little upside from strength in the Australian office market at the current time, as it notes the group’s portfolio is 97.7% leased and only about 13% of the portfolio comes up for lease renewal in FY07 and FY08. This means it has little opportunity to capitalise via higher lease rates in the short-term, JP Morgan noting this is especially the case in the booming Perth and Brisbane markets where its exposure is small relative to its portfolio as a whole.
As a result management has decided on a strategic review, which both brokers suggest will include an examination of the potential of expanding into overseas markets in an attempt to find some DPU growth.
UBS sees some upside from such a move, as on its numbers a $650m debt funded acquisition would increase gearing to 40% but would add 3% to earnings upfront, growing to 5% by year five. This is based on a 6% initial yield and 2% net property income growth.
Such a move would also fit in with management’s targets in terms of gearing, as Deutsche Bank noted the fund is currently geared at 27.7% against a target of 35%. This provides the company with as much as $230m in a war-chest for acquisitions.
With a strategic review underway there has been little change in ratings, as the FNArena database shows the stock receiving three Hold and three Reduce/Underperform ratings, while only Macquarie rates it as Outperform. JP Morgan does note the stock now looks more interesting at current levels, as after recent underperformance it now offers a 7.1% yield on a 6.5% premium to valuation.
Shares in CPA are higher this morning, as at 11.35am the stock was up 2.5c at $1.41, compared to an average target in the FNArena database of $1.36.