# Listed property trust - Good value now?



## josjes (28 February 2008)

What do people think of the whole Listed Property Trust sector now ? 
As part of a diversified long term asset allocation, property trust do have a place. If you look at the chart of ASX200 LPT over the last 7 years, you can see in hindsight what a bubble it was waiting to burst in 2007. 

This sector is replicated by a listed ETF called SLF, yielding around 8% pa on 2007 dividend, excluding tax deferred and franking benefit. 

Is the crash overdone ? is more to come ? 

My view is that, the risk to reward ratio is getting favourable. Most of the big LPT companies have reported their half year result, those that are overgeared and expanding to USA, Europe using tons of debt have been harshly (and deservedly so) punished, so the price now has probably reflected the risk forward.


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## Bill M (29 February 2008)

*Re: Listed Property Trust - Good Value now ?*

Hello josjes, I am an investor of Property Trusts. For me as a general rule a property trust should return between 8 and 9% in dividends. Once they blow out like they a couple of Months ago then alarm bells should ring. IOF was around $1.72 with a 7% div about 2 Months ago and I was thinking it was a bit rich but did nothing. Then the LPT sector crashed and so did IOF. IOF reported yesterday and I was not disappointed, long expiry on their tenancy arrangements and gearing was relatively low.

When IOF hit the skids at around $1.20 I topped up, I could not refuse a 9% dividend with a LPT that has around 97% full tenancy and long expiry leases. I have owned IOF for about 6 years and it has never missed a payment. This is only one company out of many that has been written off by the punters.

When buying a LPT, look at the NTA, Look at the current dividend, Look at their gearing and then look at how cheap it is compared to 6 Months ago. LPT's have been doing fine for me, good luck.


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## josjes (1 March 2008)

Thanks Bill for your input. It looks like LPT will still be the leper of the share market for quite a while. But buy in gloom sell in boom is the motto, although it is so hard to practice in real life, where everyone around you are going bull on the more sexy stuff like gold, commodity, and oil. 

Anyway here some article that I think is quite proportional. Hopefully will help you to see the risk and reward side. 

PORTFOLIO POINT: LPTs’ business models are likely to change to a yield focus after the Centro fall, and consolidation is likely in the sector.


The massive de-rating of the listed property trust sector following the blowup of Centro Properties Group in December has split investors into two camps: those who believe LPTs will come back in the next few months and those that believe it will remain in the wilderness for years.

Charlie Aitken, a director of Southern Cross Equities, has already said he believes it is the start of a five-year bear market for this asset class – See Go large (and avoid infrastructure). “I expect to see heavy redemptions and physical retail investor selling,” he says.

Other brokers, including UBS, JP Morgan and Merrill Lynch are more optimistic and believe the 20% (my note 30% now) fall in the LPT index since December 13 will create good buying opportunities, albeit not in the short term, and that much of it will be spurred by an upturn in M&A activity in the sector as the strong buy up the weak, which will add support to property prices in Australia.

Whatever the case, the one certainty is that the sector will continue to be volatile in the short term and LPTs that lack transparency or are heavily geared will continue to be punished. As Merrill Lynch analyst John Kim says: “There will continue to be negative sentiment surrounding the industry due to Centro and the continuing credit crisis, and it will likely take several months for the Centro saga and its aftermath to subside.”

The problems facing the sector are best summed up by Justin Blaess, director of ING’s listed property and infrastructure: “Centro epitomises the sins of the LPT sector coming home to roost.” (Centro plunged from $5 in December to 43 ¢ today).

Blaess says aggressive expansion, questionable real estate assets, high gearing, opaque accounting such as adopting equity accounting instead of consolidating risks, and expanding headlong into property development are a few of the sins the LPTs have been committing in the past few years.

Not all LPTs are sinners, but most analysts and fund managers concede that the market is not ready to look for good buys just yet. In its latest report on LPTs, UBS says the market is waiting for the next set of earnings figures in February to give some clarity to the outlook for 2008 as well as the debt profiles of stocks.

Various broking houses have put valuations on the overall return of the sector, and although this varies by degree, all expect poor returns. For instance, JP Morgan’s total return forecast for 2008 for the LPT sector is negative 9%, which is made up of a distribution yield of 6.7% and –15.5% capital growth. This follows several years where investors had come to expect 15% or more from most LPTs.

Merrill Lynch forecasts a total return for the LPT sector in 2008 of between zero and 3%. 

Most LPTs have suffered a battering since Centro went into a trading halt in December. But the ones that suffered the most have four things in common: significant funds management exposure, high levels of gearing, large refinancing pending and lower-quality foreign assets.

Historically, LPTs were favoured for their defensive characteristics, not their growth prospects, but all that changed as they expanded overseas and pushed up gearing.

A year ago the yield on LPTs fell below government bond yields for the first time in a decade. As interest rates started rising, this pushed the yields further down.

Post Centro, the world has changed. LPT yields have rebounded (see panel). Analysts, auditors and investment bankers will now start discounting the valuation they place on growth businesses and put a premium on income streams.

This will ultimately change the models of LPTs. In the meantime, there will be a shakeout in the sector. But the impending consolidation will no doubt kick-start the rerating of a few stocks as the strong, such as Stockland Trust and Westfield Group, pick over the weak.

Australian trusts that own Japanese property are particularly vulnerable to takeover or merger. Australian trusts that fall into this category include Babcock & Brown Japan, Rubicon Japan Trust and Challenger Kendix Japan Trust. These have the worst cost of capital of any LPTs and are trading on huge yields.

These Japanese LPTs have performed poorly mainly due to the perception that they are not adequately hedged against foreign exchange movements between the Australian dollar and the Yen.



Better than cash. Scott Francis.

Listed property trusts have been seriously damaged as an asset class during this current market fall. Centro has been the horror story, starting the downward slide for LPTs.

The flipside to this story is that yields in LPTs are now starting to look attractive: across the sector the average yields (following the stockmarket’s sharp declines earlier this week) are about 7.4%.

Now here is an interesting point of comparison: A good cash account is now paying 6.25% to 6.8% while the average listed property trust yield is 7.4%. The income from listed property would be expected to grow roughly in line with inflation over the long term; cash income does not grow. LPT income often pays a tax-deferred component, making it more tax-effective that the income from a cash account.

In a roundabout way the collapse of Centro makes LPTs a more transparent sector, as analysts have been poring over the balance sheets of all the listed property trusts looking for the “iceberg” of debt that sank Centro.

Analysts and commentators have been warning of two risks in LPTs for some time: the growing levels of debt, and construction risk. Centro has provided a demonstration of the problem of poorly managed debt; and Multiplex revealed construction risk through the problems it faced with the Wembley Stadium construction. However, quality listed trusts with reasonable debt levels, limited exposure to construction risk and now paying a growing income stream that is superior to cash will start to look attractive to many investors.

From :

http://www.eurekareport.com.au/iis/iis.nsf/pages/8311D28384A0CD01CA2572F400050D9F?OpenDocument


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## Kipp (2 March 2008)

*Re: Listed Property Trust - Good Value now ?*



Bill M said:


> Hello josjes, I am an investor of Property Trusts. For me as a general rule a property trust should return between 8 and 9% in dividends. Once they blow out like they a couple of Months ago then alarm bells should ring. IOF was around $1.72 with a 7% div about 2 Months ago and I was thinking it was a bit rich but did nothing. Then the LPT sector crashed and so did IOF. IOF reported yesterday and I was not disappointed, long expiry on their tenancy arrangements and gearing was relatively low.
> 
> When IOF hit the skids at around $1.20 I topped up, I could not refuse a 9% dividend with a LPT that has around 97% full tenancy and long expiry leases. I have owned IOF for about 6 years and it has never missed a payment. This is only one company out of many that has been written off by the punters.
> 
> When buying a LPT, look at the NTA, Look at the current dividend, Look at their gearing and then look at how cheap it is compared to 6 Months ago. LPT's have been doing fine for me, good luck.




I have been a long time fan of IOF, but only just bought in at Dec (when it crashed well below its NTA) and then topped up again at 1.25 recently.  I thought their half year results were pretty solid (though there was a significant drop in profit of 37%), the NTA grew to 1.80, and not one of their properties actaully dropped in value (of the 1/3 of he portfolio or so which was revalued).

Only 37% debt to equity, 5.3 years lease expiry etc etc... I am happy to hold on for a while.

RRT... is it a bargain at 26?  Or is it a Centro?  Might be worth a very small punt....


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## Julia (2 March 2008)

josjes said:


> Various broking houses have put valuations on the overall return of the sector, and although this varies by degree, all expect poor returns. For instance, JP Morgan’s total return forecast for 2008 for the LPT sector is negative 9%, which is made up of a distribution yield of 6.7% and –15.5% capital growth. This follows several years where investors had come to expect 15% or more from most LPTs.
> 
> Merrill Lynch forecasts a total return for the LPT sector in 2008 of between zero and 3%.
> 
> ...



Given the likely continuing fall in SP's in this out of favour sector, I'd rather have 7% in the E-trade cash account than 0.4% more in an entity which is likely to further decline in capital value.


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## osmosis (22 February 2009)

Its a year later and this sector has tanked significantly. Is this a good time to get in?


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## Bill M (23 February 2009)

The revival of this thread has bought back memories. This sector has tanked more than any. I was very lucky, I sold all my WDC for $17.50 around the 3rd. quarter of 2008. I also sold all my IOF holdings for around $1.31. I hold neither now. Property Trusts, called REIT's now, enter at your own risk. They are revaluing their properties currently and as the values are written down the gearing ratio increases making them even look worse. Even the good ones like Bunnings and Commonwealth Office have been hit hard. Dividends have been slashed and capital raisings are going on through out the industry. You would have to be a very brave person to get into this sector at the moment, good luck.


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## Santoro (23 February 2009)

Julia said:


> Given the likely continuing fall in SP's in this out of favour sector, I'd rather have 7% in the E-trade cash account than 0.4% more in an entity which is likely to further decline in capital value.




Jeez 7%.......do you get a special rate?


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## Santoro (23 February 2009)

Santoro said:


> Jeez 7%.......do you get a special rate?




Oops...that quote was last year thought this post was as recent as the last two...apologies.


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## Bushman (23 February 2009)

osmosis said:


> Its a year later and this sector has tanked significantly. Is this a good time to get in?




A qualified yes as it only applies to well-capitalised owners of A-grade commerical property (office and retail). It is 'back-to-basics' in the sector i.e. a return to plain-vanilla trusts with longer-term WALE's, solvent tenancies, limited capex, and in-house property management teams. 

The rest will get spanked for awhile longer yet as cap rates move north putting pressure on covenants and distributions. Stay clear of any 'growth' stories - they will not be funded in this market. 

There is real upside though - most are being valued at a discount to NTA. As NTA/gearing stabilises, value will appear. Also there are some solid unlisted trusts in some of the funds management portfolio which will continue to generate recurring management fees. Typically this is not being discounted into share prices at all.   

Remember that listed-vehicles are superannuation funds preferred investment vehicle as they provide liquidity for the funds. I went to a presentation the other day that states that super industry funds FUM will grow from $1.2t to $2.2t in the next 5-years. They typically allocate 10% to property in their portfolios - lots of cash needing a home. They will now want plain-vanilla listed trusts with government/blue-chip tenants in green buildings. So the A-REIT trusts that survive by selling 'growth' assets and raising capital (might still need to another round of capital rasing by the way as economic conditions impact vals through vacancies etc) will prosper once cashed industry funds look to inject new funds into the property sector. 

IMO, my 2c, etc. As Bill M said, tread cautiously as there is still potentially some land mines to go but also have a longer-term view.

And next time we are at the top of the market, avoid the cowboys!!!


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## Julia (23 February 2009)

Santoro said:


> Oops...that quote was last year thought this post was as recent as the last two...apologies.



Hah!  Wish my last post really had been made so recently!


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