1. 24 Sep 2009 The Screen Watcher (d) +613 9640 3804 (m) 0406 425 550
(f) +613 9640 3800
LPTs WDC: the default selection?
LPTs (or AREITs as they are now known) were traditionally seen Two things you need to know about WDC; first it has about
by investors as lowly geared, defensive investments, offering non 43% weight of the ASX LPT sector. Second it is the largest
correlated returns to equity markets. How wrong could we have retail REIT in the world. This is a 2 edge sword. Positively, it
been! Excessive leverage, complex Joint Venture models, is well run, has a globally diversified portfolio – moderately
unwieldy structures sometimes built on cross border currency and geared and well understood (and loved) by investors.
asset class arbitrage all combined to crunch this asset class. Conversely, if you are looking to outperform the LPT index,
then you have to form a view on relative performance of WDC
It has been somewhat of a Lazarus rally in the sector over the
vs. the rest. Also, WDC has been often used as a “funding
past 6 months. Investors have been indiscriminate in stock
currency” by the market when other LPTs have come in to
selection – many simply punting that the sector was undervalued
raise equity – fund managers sell WDC to raise funds to invest
and all stocks would rise. However, unlike Lazarus, some of
in the new raisings.
these funds may indeed continue to rise from the dead only to
The graph below shows WDC's performance viz a vis the
lapse back into a coma and possibly death sometime in the future.
whole LPT sector. A relative rock but not immune.
Factors driving the LPT sector
XPJ vs WDC
Bull Factors Bear Factors
Low Interest Rates (floating) Rising Interest Rates (fixed) 140
Banks prepared to carry “bad” • Tight bank covenants
loans vs. foreclose • Banks rolling facilities shorter 100
• Higher margins
Australia avoids recession Rising Unemployment
60
Confidence holding
Retail Sales holding up Stimulus impact receding
Balance sheets are getting Equity Raising Fatigue 20
23/09/05 23/09/06 23/09/07 23/09/08 23/09/09
repaired Limited leverage going Underperformance
forward for sector XPJ WDC
Of 38%
Investors want rebound stories Recapitalisation and
conservatism are in vogue For those that want a “set and forget” allocation to AREITs
Low Vacancy rates at this point Potential logjam of physical then WDC will, by default, get you mostly there. This is the
vs. previous bear cycles property sale offerings same allocation methodology as buying PTM for International
Credit Markets reopen Only quality names can access or BHP as the defacto asset selection in Commodities &
Seen as Cheap Overall sector yields are not Resources/ sector. For those that want to search for other
attractive vs. bond equivalent. names read on.......
LPTs as a non correlated asset Screening Criteria
Many a financial plan has allocated client portfolio funds to LPTs In the attached spreadsheet I outline the key metrics to evaluate
to provide diversification to Equities with a Fixed Interest type the respective companies in the sector. I suggest that readers
income stream. However, as the graph below shows for the past 4 look through the list of criteria to make filtering decisions.
years LPTs were instead highly correlated to equities and then,
instead of providing a hedge to equities massively Code Price Mkt Cap Index DPS
Quantitative Filters
Yield Gearing NAV Price/ Liquidity
underperformed (leveraged beta). (m) 2010 (f) % % NTA Daily Vol
Abacus ABP Mixed $0.410 $368 XPJ 3 7.32 30.0 $0.35 -17% Fair
Astro Japan AJA Office $0.430 $222 XPJ 9 20.9 57.9 $0.67 36% Poor
4 years ASX 200 vs ASX Property 200 APN Property APD Mixed $0.340 $47 1 2.9 32.3 $0.15 -127% Poor
Australand ALZ Devel $0.555 $1,155 XXJ 4.2 7.6 36.2 $0.56 1% Good
160 Bunnings BWP Retail $1.825 $543 XPJ 12.1 6.6 20.9 $1.67 -9% Fair
CFS Retail CFX Retail $1.930 $3,749 XPJ 12.5 6.5 28.0 $2.02 4% V Good
120 See Attached spreadsheet
Potential investments parameters to consider are (and not an
80
exhaustive list):
40 Gearing – Low 25% > Med 40% > High > 40%
0
54% Yield – must compensate for the risk
underperformance
23/09/2005 XJO XPJ Have Raised Funds – avoid dilution
Discount to Asset Valuation (NTA) – offers a buffer
“A Rolling Loan gathers No Loss” Recommendations
So what confidence do we have in the future for LPTs? I’d One of the hardest issues that I have with reading research in
suggest that a phone call into your friendly banker may be good this sector was how fundamentally wrong a lot of analysts were
move. The banks are dictating the Loan to Valuation ratios, over the past 2 years. So, here we go:
interest cover, other key ratios and loan durations. Where they
Conservative Investors picks are CFX (Retail), CPA (Office)
have problem assets, the Banks are ensuring that property vales
Moderate – MOF (Office), DXS (Mixed) LLC (Developer)
do not receive undue pressure by foreclosing – but this means
Aggressive – GMG (Industrial)
property values will be capped (think Japan in the1990’s).
The Advice contained in this document is general advice. It has been Again, happy to discuss. WHTM Research has in-depth
prepared without taking account of any person’s objectives, financial material. Good Hunting.
situation or needs and because of that, any person should, before acting on
the advice, consider the appropriateness of the advice, having regard to the
client’s objectives, financial situation and needs. If the advice relates to an Colin Campbell
acquisition or possible acquisition of a particular financial product – the Investment Adviser Licensee Representative Wilson HTM Ltd
client should obtain a Product Disclosure Statement relating to the product colin.campbell@wilsonhtm.com.au
and consider the statement before making any decision about whether to
acquire the product. This communication is not to be disclosed in whole or
part without Wilson HTM’s prior consent.