REITs Attractive Ahead Of June Distributions

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– Australian REITs outperformed broader market last week
– June a big month for REIT dividends
– Distribution yields attractive, dividends are growing
– Wide range of broker view among REITs

By Chris Shaw

For the week ending May 20 the Australian REIT (real estate investment trust) sector index rose 1.7%, which was solid outperformance compared to a 0.7% gain in the broader equity market for the period. 

BA Merrill Lynch sees this as a reflection of value still on offer in the sector, as overall the REITs trade at an average discount of 6.7% (ex Westfield) to BA-ML's price targets. Adding in dividends and BA-ML is forecasting an implied total return for the sector of 14.9%.

As many as 16 Australian REITs are expected to trade ex-dividend on June 24, JP Morgan forecasting a weighted average expected yield for June dividends of 2.9%. This compares to overall FY11 dividend per unit yield of 6.3%, with the sector expected to record dividend growth of 4.4% for FY11 as a whole.

In the view of JP Morgan the four most attractive yields for stocks going ex in June are Astro Japan Property Trust ((AJA)) at 6.6%, Ale Property Group ((LEP)) at 4.3%, Abacus Property Group ((ABP)) at 3.8% and Charter Hall Retail ((CQR)) at 3.7%. These four stocks also represent the highest FY11 yields.

Among those delivering the strongest increases in distributions in FY11 are FKP Property ((FKP)), where the payout should be double that of last year, and Charter Hall Group ((CHC)), where the distribution is forecast to be up 27.5% from last year on JP Morgan's numbers.

For the sector as a whole JP Morgan notes the S&P/ASX300 REITs index is trading on a 6.1% dividend yield, which is 79 basis points above the 10-year bond yield of 5.3%. This is above the average spread over the past 21 years of 37 basis points.

In the view of JP Morgan, the potential for monetary policy to tighten further in the short to medium-term means there is scope for REIT sector dividend yields to also move higher. This suggests some opportunities for income-seeking investors.

JP Morgan rates Astro Japan and Ale Property as Overweights, while the broker is Underweight with respect to Abacus and Neutral on Charter Hall Retail.

Following quarterly updates by most of the Australian REITs, Deutsche Bank suggests the picture for those with retail exposure is actually more favourable than retail sales figure would suggest. As with JP Morgan, Deutsche Bank picked up on the widening of average spreads for REITs relative to bond yields, noting the spread has turned positive for the first time in 17 months. This is likely to attract some attention ahead of upcoming June distributions.

In the sector Deutsche Bank favours the larger plays, rating Stockland ((SGP)), Westfield ((WDC)), Mirvac ((MGR)) and Goodman Group ((GMG)) all as Buys. Stockland in particular offers compelling value given recent underperformance in Deutsche's view, while US dollar-related weakness in Westfield appears overplayed and solid momentum should provide pricing support for Goodman.

Deutsche also rates Westfield Retail ((WRT)) as a Buy, while assigning Hold ratings to Dexus ((DXS)), CFS Retail ((CFX)), GPT ((GPT)), Commonwealth Property Office ((CPA)) and ING Office ((IOF)) and a Sell rating to Charter Hall Office ((CQO)) as the stock appears expensive even given potential US asset sales.

While a share buyback should support GPT's share price Deutsche sees little scope for outperformance at present, while Dexus is similarly unlikely to outperform given little new progress in development leasing.

BA-ML has made a recent change to sector ratings, downgrading Charter Hall to Neutral in relative valuation grounds and a lack of near-term catalysts for the share price. Abacus Property, Charter Hall Retail, FKP Property, GPT and Lend Lease ((LLC)) are also rated as Neutrals by BA-ML, while the broker is negative on Commonwealth Property Office, Goodman Group, Ardent Leisure ((AAD)), Australand ((ALZ)) and Dexus.

BA-ML rates Charter Hall Office, ING Office, Bunnings Warehouse Property Trust ((BWP)), CFS Retail, Westfield, Westfield Retail, Astro Japan, Challenger Diversified ((CDI)), Cromwell Group ((CMW)), Mirvac, Stockland and Peet Limited (PPC)) as Buys.

JP Morgan has finished a tour of REITs with exposure to the Western Australian market, and suggests achieving strong exposure to that market is difficult as most of the major REITs have less than 10% of their assets in the market.

Centro Retail ((CER)) offers the largest exposure with 33% of assets in WA, followed by Bunnings Warehouse with 16% of assets in the market. Medium-term JP Morgan expects the Perth market to benefit from significant mining and investment infrastructure given more than $150 billion in resource projects committed to or under consideration.

One offsetting factor is likely to be construction costs, which are around 20% higher in WA than for the eastern states. This is largely a reflection of higher labour costs given higher paying alternatives in the energy and resources industries.

In the Perth residential market JP Morgan suggests current oversupply is likely to keep prices flat for 12-18 months until this supply can be worked through. Increased demand from resource and related service companies is helping strengthen the Perth office market, with falling vacancies and a lack of available space potentially kick-starting another development cycle in JP Morgan's view. 

 
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