Antares Equities on how to evaluate property companies results

Funds Management

by Jessica Amir

Transcription of Finance News Network Interview with Antares Equities Fund Portfolio Manager, Brett McNeill.

Jessica Amir: Hello I’m Jessica Amir for the Finance News Network. With me today from Antares Equities Fund is Portfolio Manager, Brett McNeill, welcome back to the Network.

Brett McNeill: Thanks Jessica.

Jessica Amir: We’ve just wrapped up reporting season. What did you analyse in the reporting season, and what are the key takeaways?

Brett McNeill: We looked at nearly 40 results from the property companies and that includes the Real Estate Investment Trusts REITs, the REITs as they’re commonly referred to. As well as a host of property development companies and property fund management companies, both small and large caps. The three key takeaways that we took from the profit-reporting season were, one, that the office sector remains very strong. So it’s been a standout in terms of the growth and the valuation growth.

Secondly, growth in net tangible asset per share or NTA, which is a common metric in the REIT sector, NTA was extremely strong. It came in at an average of about eight per cent for the sector as a whole, which is very good, led by Scentre Group (ASX:SCG) at 15 per cent valuation growth and Investa Office Fund (ASX:IOF) at about 14 per cent. So overall, NTA growth was very good.

And thirdly, balance sheets remain in good shape, gearing levels are at pretty sensible levels and distribution payout ratios, look to be sustainable for us.

Jessica Amir: Further to that, you just mentioned balance sheets. What’s the importance of analysing balance sheets in the listed property sector?

Brett McNeill: Debt is always a reasonable component of property investment. So looking at balance sheets and analysing them in detail, not just across the sector but at the individual security level, is of crucial importance when investing in the REIT sector, the property space. And the key metric we think to look at is always look through gearing, not just the headline balance sheet gearing. Because you need to take account of all the structuring and the co-investment stakes that REITs might take. So look through gearing is the key metric there and that looks very good overall.

So the 29 per cent on average is the gearing level, on a look through basis and that is quite solid. It’s certainly much lower than what it was before the GFC, 10 years ago. But that’s a sector average, it varies a lot within the stock. So at the lower end of the gearing range, we’ve got stocks like GDI Property Group (ASX:GDI), who are geared at less than 10 per cent and Goodman Group (ASX:GMG), who are geared at 16 per cent on a look through basis. So they’re both quite low. Whereas at the higher end of the spectrum, we’ve got groups like Cromwell Property Group (ASX:CMW) that are geared over 40 per cent.

Short-term debt is very risky when investing in property. And ideally, we’re looking for REITs that term out their debt - that aren’t relying overly on short-term debt. So we want debt maturities ideally at five years plus and some of the large cap stocks, such as Unibail-Rodamco-Westfield (ASX:URW), Goodman Group (ASX:GMG), Mirvac Group (ASX:MGR) and Dexus Property Group (ASX:DXS, all have debt maturity levels around 6-7 years on average. Whereas there’s a number of REITs, and they tend to be the small cap REITs, that have debt maturities of less than three years. So we think that’s quite risky.

Jessica Amir: Aside from balance sheets. What other factors do you consider when analysing a company’s profit results, and based on that, what stocks do you like?

Brett McNeill: There’s a number of key fundamental investment factors in our analysis. So as well as balance sheets, namely management quality, there are property investment performance, the portfolios that the REITs own, growth prospects and strategies, corporate governance is always important. And wrapped up in all of that is our valuations that we conduct, of all the REIT securities.So based on those factors, three of the stocks that we prefer at the moment: Scentre Group. We think it trades at a discount to our assessment of the underlying net property value.

We’ve also got Unibail-Rodamco-Westfield. Similar toScentre Group, it’s very high quality and it’s good value. It offers an additional benefit of international diversification, given they own high quality shopping centres in Continental Europe, United Kingdom and United States. If management can deliver, we think the stock’s very good value at the moment. And we’ve also got Stockland Group (ASX:SGP).

Stockland is an out of favour REIT, but we think it’s quite a decent business. The balance sheet’s reasonable, the property portfolio needs some reworking in the retail space, in particular. But also, they’ve got a REIT residential development business, it’s been a terrific performer. Currently offers a dividend yield of about 6.5 per cent for financial year 2018/19, and that can grow as well. They’re expecting growth of about six per cent for the following financial year. So that stacks up quite well.

Jessica Amir: Thanks for sharing what stocks you do like. Now can you tell us what stocks and sectors aren’t so favourable?

Brett McNeill: The office sector to us looks quite expensive at the moment. The sector has had a fantastic run, valuation growth and rent growth. But the office sector is driven by cyclical factors, not structure, we would argue and the cycle’s been very kind to the office sector. So we think at the moment we’re wary of that. But also the cash yields on office assets are very low at the moment, even for high quality ones. And so for that reason, we’re cautious on stocks like Dexus Property Group and Cromwell Property Group.

Another stock that we note is Goodman Group, which is a fantastic business. It’s got great management, they manage the balance sheet extremely well and they are in a very attractive sector at the moment, being industrial property globally. We just think that the valuation is too high at the moment, so we’re cautious on that one.

Jessica Amir: Bret McNeill, thank you so much for your insights.

Brett McNeill: Thank you.


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