S put forward a compelling case for Australian REITs, thanks S, as a comment in this post. Feel free to pitch in opinions or free information sources on this or anything.

Quick Questions and a Few Answers

• trading below NTA. See long term NTA chart below.
• yield 7.5-8%. See 5yr chart below for yield.
• gearing 30% down form 40%
• most buyers this year international. Currency risk? Those same buyers will be sellers if USD strengthens.
• check size of write-downs, risk or opportunity?
• what is their individual and collective debt priced at?
• how will rising interest impact on returns?
• SLF is the A-REIT ETF for the S&P 200 A-REIT index XPJ. NAV of index. Looking at those holdings I’m left wondering if I should simply continue to watch Westfield (WDC).

ASX A-REIT Performance

The following chart is from the ASX. It’s a shame they can’t update their pages more frequently, this chart is over a year old, but it still gives a good long term picture.

Zooming in on the last five years of XPJ

Australian REITs Net Tangible Assets

That chart looks like it’s from March 2009, when A-REITs bottomed.

ASX A-REIT Market Capitalisation

Follow-up Notes

This excellent follow-up comment from S has accelerated my morning task of getting up to speed on A-REITs.

At 850, estimates of discount to NTA by the brokers range from 1% to 15%. At current prices WDC (Westfield), the main constituent (50%) of the index is trading at 12.27, book value 12.6, NTA 11. P:B for WDC is 0.97, for the rest of the sector it’s 0.6-0.7. When the index was at 950, there was less of margin for haircut than say 800.

Looking at the REIT business model, the main income is from rental and the main cost is interest. For WDC this was 50% of expenses. It ballooned out last year, for WDC, their net interest expense last year was 334m compared to 233m the year before. The other trusts probably had a bigger hit. The GFC made them short term insolvent with completely unavailable credit or through the roof credit spreads. I think this should continue to normalise and their interest expense may go down in the next 2 years despite increases in the cash rate. They should be able to start to tap the bond market again, particularly in Australia.

Unfortuantely, the refinancing in the last year was at userous rates but going forward, the refinancing cost should go down.

The main risk to distributions in the next year is that WDC will reduce theirs to 80% earnings from next year, currently it is 100%. I think this is largely anticipated.

I am looking at trying to get a holding in SLF at an average cost basis of 7.6. I think the upside is capital appreciation from the index going back to NTA of the underlying assets, increased distributions due to reduced cost of funding, further write downs being smaller than anticipated and actual capital appreciation in the underlying properties in the long term. Due to the carnage in the last 2 years there is actually little in the pipeline for retail or office space in Australia in the next 2 years and rather than further write downs of 15%, there may actually be a small appreciation in NTA if economic activity remains buoyant.

SLF peaked at $24 in 2007, there has been $10 per share in writedowns since then and the current price is $8 (which means another $6 was vapourised somewhere).

Here’s some more bullish opinions to balance out Dan’s more pesssimistic outlook. [Top four articles below]

Articles

• Listed property securities – have they bottomed? AMP Capital Investors
• Australian REIT Sector Update Credit Suisse
• Listed property: Out of the abyss Money Management
• REITs on the retreat after $20b losses The Age Business Day
• Don’t Buy the A-REITs Dan Denning
• Debt behind AREIT woes June 09 By Michael Doble

Related posts:

1. A Snapshot into Fund Managers Performance
2. Australian Interest Rate Securities and GTPGA