Beyond big trusts
LPTs are providing an investment opportunity, Florence Chong reports
JOHN Welch hopes to raise $ 300 million from retail investors in coming weeks to buy stock in small to medium listed property trusts ( LPTs). These stocks are not included in the sector’s benchmark indices, but look ripe for a round of takeovers and mergers.
Most property securities managers focus on the top 24 trusts on the main S& P/ ASX200 Index, and usually don’t go beyond the broader S& P/ ASX300 index of 36 LPTs.
‘‘ There are 71 property trusts among the 115 odd companies on the real estate index,’’ says Welch, former head of research with Property Investment Research and now investment director with Armytage Property Funds Managers.
Welch says investors can mine good value from non- indexed trusts, as many own quality assets with strong rental income streams.
When people talk about LPTs, the tendency is to discuss only the top 30 or so, Property Investment Research analyst Bevan Patel says.
The research house looks at 34 trusts, which between them make up 85 per cent ($ 138.2 billion) of the $ 170.5 billion market value of the entire sector.
The biggest trust is the Westfield Group, with market value of $ 34.5 billion, and the top 10 add up to $ 116 billion, Patel says.
The smallest is an entertainment trust, MME, capitalised at just $ 4.8 million. While some investors are interested in the rats and mice of the sector, Armytage is focusing on mid- cap trusts, which are expected to be takeover targets.
Hotel trust Grand Hotel Group was recently taken private. The bidders, Morgan Stanley and Singapore- based Tuan Sing, were forced to raise their offer price from $ 1.10 to $ 1.30 a unit to win unitholders’ approval.
Patel says the smaller trusts may not attract the same interest as mid- cap LPTs because they may not justify the takeover expense for access to ‘‘ a few million of dollars of assets’’.
‘‘ The bigger trusts present ready platform,’’ he says.
Angelo Del Borrello, managing director of mid- cap LPT Aspen Property Group, says he would like to merge with another company but on a ‘‘ friendly basis’’.
Aspen, with a market value of $ 554 million, is not vulnerable to takeover because only the nonperforming trusts are likely to be targetted, he says.
Aspen and Trinity Group, which has a market value of $ 589 million, are among the nonindexed trusts covered by brokers.
Shaw Stockbroking, research head Scott Marshall says Trinity is ‘‘ an excellent performer’’ and its price has risen strongly this year.
Trinity’s value will catch up with its share price.
Similarly, he likes the Perthbased Aspen because it is a ‘‘ solid, aggressive, growth- seeking company’’.
Welch, who plans to place 45 per cent of funds raised in nonindexed trusts, says: ‘‘ They are undervalued. The biggest attraction to me is the yield they offer.’’
The better ones yield 8- 10 per cent, compared with 5.5 per cent for the top trusts, he says.
These are true property trusts with revenues coming from rental income and not from risky development or other activities.
We like Rubicon America, which gets its income from rental and 72 per cent of that income is from US government agencies,’’ Welch says.
Westpac Office Trust is another of his choices. The trust’s unitholders made a 50 per cent downpayment ( 50c) for the units, with the balance to be called up in 2011. The asset backing of this trust is already $ 1.23, he says.
The trust owns four prime office buildings, including the Westpac head office in Sydney’s Kent Street, valued at more than $ 1 billion.
Another mid- cap, Cromwell Group, owns assets valued at $ 1.5 billion across Australia after it stapled an unlisted property trust to the company last November, group director Daryl Wilson says.
About 80 per cent of Cromwell’s earnings come from rents on commercial properties in Brisbane, Perth, Sydney and Melbourne, Wilson says.
The company expects rents to grow at 4 per cent a year in the medium term.
Its funds under management have been grown about 20 per cent annually over the last three to four years, and Cromwell’s earnings growth is tipped to be in the 8- 9 per cent range this year.
Craig Dunstan, managing di- rector of fund manager MacarthurCook, says 80 per cent of the unitholders in MacarthurCook Property Securities Fund are retail investors.
The trust delivers yields of about 8.8 per cent a year and targets annual distributions of about 9.5 cents per unit each year.
Another mid- cap, Perth developer and fund manager Peet Ltd ($ 882 million market value) has recorded compound profit grow of 24 per cent each year between 2003 and 2006, according to chief executive Warwick Hemsley.
Distribution grew from 14.8c a share to 18.4c last year, he says.
The market expects Peet to lift distribution to about 21c a unit this year.
Aspen’s Del Borrello says distribution to unitholders rose each year by 22 per cent since the company floated in 2002.
More than half of the group’s earnings come from rental income from commercial, retail and industrial properties located in capital cities, he says.
It also has 20 per cent stake in Aspen Park, a fund holding 18 caravan parks, valued at $ 150 million and a 20 per cent stake in Aspen Diversified Fund, which has nine office buildings valued at $ 140 million.
Aspen’s shares are now trading at $ 2.27 — up from $ 1.50 this time last year.
We pay out 85- 90 per cent of our profits,’’ Del Borrello says, but he declines to forecast profits for financial year 2008.
We are pretty confident that we would produce above- market average earnings.’’