More Oz REIT Enthusiasm

This story features CHARTER HALL RETAIL REIT, and other companies. For more info SHARE ANALYSIS: CQR

– More brokers review Oz REIT reporting season
– Few surprises in results, guidance solid
– Markets still patchy, preferred exposures updated

By Chris Shaw

Top line net operating income (NOI) growth is usually a key point of focus during Australian REIT profit reporting season, and in the view of Goldman Sachs this measure was far more stable in FY11 as rent growth rate changes were mild across most sectors.

This ties in with the JP Morgan view earnings reports for Australian REITs contained no major surprises, as earnings results were largely in line with forecasts. The fact results met expectations helped REITs strongly outperform through the reporting season period on JP Morgan's numbers, as defensive characteristics came to the fore in what was a volatile time for markets.

Post reporting season JP Morgan suggests Australian REITs are cheap, trading at a weighted average discount to price targets of 18%. There is scope for this valuation gap to close somewhat in the coming year, as guidance for FY12 from Australian REITs was reasonable.

Goldman Sachs agrees, pointing out there is earnings per share (EPS) upside risk for REITs generally if more take the lead of GPT ((GPT)) and renegotiate debt margins lower prior to facility maturity dates.

As well, Credit Suisse notes of companies under its coverage, six offered better than expected guidance, three gave guidance in line and three delivered guidance below expectations. 

REIT distribution payout policies were largely unchanged in the period, though Credit Suisse notes special dividends and buybacks were common initiatives during the period.

Looking at direct markets, Credit Suisse notes positive levels of leasing demand were reported in most office markets during the second quarter of 2011, with demand strongest in the Sydney and Brisbane CBDs. 

Goldman Sachs is not as positive on some office markets, expecting office rent growth in Sydney is likely to remain mediocre given high levels of incentives. Downside risk is minimal at present, while Goldman Sachs sees further upside at some point in the future. This is especially the case given occupancy levels are trending higher across all asset classes.

While retail sales growth remains disappointing the market is continuing to price in cuts to official interest rates and if this occurs, Credit Suisse expects such moves will be at least somewhat supportive for retail sales. For the retail sector in general, Credit Suisse notes occupancy remains high and specialty sales have given signs of turning a corner, helping rental spreads to hold up. 

Enquiry levels in the residential sector have improved of late according to Credit Suisse, but consumers continue to adopt a cautious approach. Rate cuts could drive a recovery in conversion rates, but the key for residential developers is to account for both volumes and margins.

Goldman Sachs expects the residential property market will remain patchy, meaning the outlook for developers will be highly dependent on the geographic location of major projects. 

Given some signs of improvement in market conditions, Credit Suisse retains a preference for quality names in the sector. There is greater implied value for retail names at current pricing, so Credit Suisse has Outperform ratings on Westfield Group ((WDC)), Westfield Retail ((WRT)) and CFS Retail Property ((CFX)).

Among the residential plays, Credit Suisse prefers Mirvac ((MGR)) and rates the stock Outperform against a Neutral rating for Stockland ((SGP)). Among office plays, Credit Suisse has Dexus ((DXS)) as its preferred play and rates the stock as Outperform.

When identifying preferred stocks Goldman Sachs points out an issue at present for the sector is a lack of triggers given the current weakness in consumer sentiment. Value is evident however, as on Goldman Sachs's numbers the sector is trading at an average discount to valuation of around 16.5%.

Key overweight ideas for Goldman Sachs are Charter Hall Group ((CHC)) given a low multiple and attractive yield, Goodman Group ((GMG)) for a solid earnings growth outlook and Stockland given a discount to valuation currently of around 20%.

The key underweight ideas of Goldman Sachs are GPT given a high earnings multiple for FY12 and Investa Office ((IOF)) thanks to a lack of short-term net positive catalysts.

The re-rating of the REIT sector over the past month has driven JP Morgan to adjust some ratings post the result season, the broker downgrading CFS Retail to Neutral from Overweight and both Commonwealth Property Office ((CPA)) and Charter Hall Retail ((CQR)) to Underweight recommendations from Neutral ratings previously.

At the larger cap end of the sector JP Morgan continues to prefer Stockland for a quality residential business, Westfield Retail on valuation grounds, GPT for an improving earnings outlook and Mirvac given the expectation of a medium-term earnings recovery.

Among the smaller cap plays JP Morgan's preferred exposures are FKP Properties ((FKP)), Charter Hall Group, Ale Property Group ((LEP)), Carindale Property Trust ((CDP)) and Astro Japan Property ((AJA)).  

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