Major Australian property trusts have recapitalised and are armed with stronger balance sheets, but some may have raised too much equity at the expense of future earnings growth.
In the first half of 2009, Australian real estate investment trusts (Reits) raised more than A$9 billion (S$10.52 billion) in equity to pare down debt, with banks reluctant to extend loans or demanding sharply higher interest rates amid a global financial crisis.
Many Reits have tapped the market twice in less than a year. There have been fewer asset sales as bidders and sellers disagreed on prices and potential investors found it hard to borrow.
But the massive fund raising has been at the expense of earnings per share, and brokers such as Citigroup see negative earnings growth for major Australian Reits such as GPT Group.
‘Was that better for unit holders for some of those vehicles to have these massively dilutive capital raisings or would it have been better off to sell top quality assets?,’ Darren Steinberg, head of property for Colonial First State Global Asset Management said at this week’s Reuters Global Real Estate Summit.
‘Some groups have done the math very well . . . other groups have taken a lot of money when potentially they did not have to take,’ said Mr Steinberg, who added that some groups will find it difficult to replicate the earnings they achieved in the past.
The capital-raisings came at the expense of earnings growth, analysts say. Citigroup expects core earnings per share (EPS), which is adjusted for non-cash items, for GPT to fall 67 per cent by the end of 2009 from 2008, with a further 12 per cent drop likely in 2010.
Other analysts project the overall property sector to post the biggest fall of more than 15 per cent in EPS among other sectors in the next 12 months.
‘The ones that have big rights issues will massively lag those that did not have, because they gave the upside away,’ said Simon Marais, managing director for Orbis Investment Management.
The core EPS for Stockland Group, Australia’s second-largest property trust, is projected to drop 19 per cent for the year to June and is likely to decline another 24 per cent by June 2010, according to Citigroup estimates.
Mirvac Group is expected to see its core EPS fall 43 per cent for the year to June and a further 24 per cent by the end of fiscal year 2010. Mirvac earlier this month moved to raise up to A$1.1 billion in fresh equity as it announced major asset writedowns and cut its earnings guidance.
As the economy continues to falter and halted development projects limits future rental growth, expectations are growing that mergers and acquisitions will be the next earnings driver.
‘If they’ve over raised, then they may be looking to do M&A opportunities which would then give them earnings growth,’ said Bob Johnston, managing director for Australand Property Group.
Still, Reits may not be ready just yet. In the last nine months, investors have been asked to shoulder the burden of the over-geared acquisitions that came from 2002 through 2006 as Reits expanded aggressively offshore in a bid to boost yields, according to JP Morgan.
‘Reit investors are only now paying for acquisitions made by the Reits up to five years ago,’ the brokerage firm said this month.
There are investors who see things differently. They say share prices are still cheap as the Australian Reit market, the third largest in the world after the United States and France, has faltered in the last six months.
The Australian Reit index is up around 35 per cent from a record low hit in March, but still down some 50 per cent from levels seen a year ago.
Some Australian Reits are still trading at a discount to their underlying assets.
And the fact that Reits have managed to complete their fund raising is a sign of investors’ confidence in Australian property and property trusts, said Ian Mackie, Asia CIO for LaSalle Investment Management.
‘One thing that has amazed me in the last few weeks is the amount of capital the Australian property trusts have been able to raise . . . It’s taken the market by surprise,’ he said.
Source : Business Times – 25 Jun 2009
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