Be­yond big trusts

LPTs are pro­vid­ing an in­vest­ment op­por­tu­nity, Florence Chong re­ports

The Weekend Australian - Review - - Prime Space -

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.’’

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