A-REITs: Where Is Growth Coming From?

Array
(
    [0] => Array
        (
            [0] => ((SCG))
            [1] => ((GPT))
            [2] => ((CFX))
            [3] => ((WFD))
            [4] => ((MGR))
            [5] => ((PPC))
            [6] => ((NSR))
        )

    [1] => Array
        (
            [0] => SCG
            [1] => GPT
            [2] => CFX
            [3] => WFD
            [4] => MGR
            [5] => PPC
            [6] => NSR
        )

)

This story features SCENTRE GROUP, and other companies.
For more info SHARE ANALYSIS: SCG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

-Department stores weaken
-Mall re-leasing spreads flat
-Westfield returns provide support
-National Storage offers growth
 

By Eva Brocklehurst

What is happening with retail sales? How does it reflect on the outlook for Australian shopping centres? JP Morgan observes rolling average annual rates of growth are trending higher but sales remain volatile on a seasonally adjusted, month-on-month, basis – affected by such items as the federal budget blues and a warm start to winter. The broker believes it is important to look at the bigger picture growth metric when measuring retail sales. To this end the June and September quarters should hold up reasonably well. Nevertheless, without a commensurate improvement in consumer sentiment, the broker thinks the December quarter may struggle to maintain the positive trend.

Charting retail growth rates and retail categories suggests to JP Morgan that clothing, footwear & accessories is diverging further from department stores with the former building momentum, while the latter is dipping further into negative. Historically, the two have been strongly related, probably relating to shared exposure to non-discretionary spending. Now, JP Morgan finds this relationship is breaking down.

The analysis suggests that re-leasing spreads for shopping centre landlords will not materially improve over the next 12 months, with a further recovery in sales needed before spreads turn positive. A strong recovery is expected in two to three years time, as very weak sales growth drops out of the calculation and the hoped-for stronger numbers eventuate. In terms of Australian discretionary retailers the outlook is mixed. JP Morgan notes housing remains a strong area, especially hardware, while supermarkets, restaurants and cafes are strengthening. The broker expects the more affluent shopping areas will benefit from housing and equity wealth factors while the less affluent are more likely to be affected by rising unemployment.

On a stock specific basis the broker's analysis show a retail sales tailwind for Scentre Group ((SCG)) of 4.4% on a moving annual growth basis and 4.7% for GPT ((GPT)). CFS Retail ((CFX)) has a less favourable centre sales environment because of its geographic exposure, heavily weighted to Victoria, while the former two are weighted towards NSW where sales growth is stronger.

Australian Real Estate Investment Trusts (A-REITs) are trading in line with BA-Merrill Lynch's valuations and this suggests the sector is fully valued. The broker notes the average distribution yield of 5.3% is 175 basis points ahead of the 10-year bond yield and this is broadly in line with the long-term average. The yield trade has been well supported and the broker expects the sector to continue outperforming through August, given the uncertainty over the earnings outlook compared with the broader market. The capital returns from the restructure of Westfield assets into Scentre Group and Westfield Corp ((WFD)) are likely to support the sector as investors look to reinvest.

The broker has undertaken a review of GPT's industrial development business and thinks there is opportunity for growth in this portfolio as one of the ways to expand the company's asset exposure. Moreover, the establishment of an industrial wholesale fund should add to earnings growth. Mirvac ((MGR)) has announced a number of asset sales recently and Merrills thinks the market is now looking at that company's future capital commitments. With significant commercial and residential projects, capital allocation will be critical to maintaining a healthy balance sheet. The broker thinks the company is well capitalised to execute on the current pipeline. Another stock Merrills thinks is well placed is Peet ((PPC)), as it benefits from improved housing market volumes. The company is expected to announce its first distribution in three years at the August results, highlighting the improved outlook for cash flow from 2015.

National Storage ((NSR)) is the first ASX listed, internally managed, integrated owner of self storage centres. Morgans has initiated coverage with an Add rating and $1.37 target. The company offers investors a leading brand in self storage and a diversified portfolio across Australia. Morgans likes the highly scalable operating platform, conservative gearing and future growth via acquisitions, given the fragmented market. The distribution yield for FY15 forecasts is also attractive, at 6.6%. The biggest drivers of revenue are occupancy, with 74.4% expected by year end, and rental rates, with average growth of 4% per annum over the past 10 years. The company listed last December at 98c, having been established in 2000. National Storage is the second largest group in Australia by number of owned centres and third by number of centres under operation and management. It has a 10% equity interest in a portfolio owned by Southern Cross Storage.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms