Service Stations, Storage Units, Online Shopping and ‘The Bunnings Effect’ keep AREIT stocks afloat: BDO’s 26th Annual Survey of Australian Real Estate Investment Trusts

08 December 2020

Service stations, storage units, soaring demand for online shopping and ‘the Bunnings effect’ have allowed Australian Real Estate Investment Trusts (AREITs) stocks to show some resilience after a tumultuous year for real estate markets globally.

AREITs saw performance slumps across the board but values held for those with logistics and warehouse units servicing huge volumes of online shopping orders, and those with community assets such as caravan parks, Bunnings properties and service station assets.

The results come from the latest analysis by professional services firm BDO Australia in the 26th Annual Survey of AREITs.

BDO Australia’s AREIT specialist, Corporate Finance Partner, Sebastian Stevens, said:
“The AREIT sector was adversely impacted by the outbreak of the COVID-19 pandemic in February and March given the large exposure to retail and office categories who were impacted by mandatory lockdowns and the uptake of employees shifting to work from home arrangements.”

“The financial consequences of COVID19 has made it particularly challenging for some AREITs to deliver their usual strong performance,” he said.

“It’s certainly a case of not all AREITs being created equal, with the pandemic having a varying impact across the three main market sectors: retail; office; and industrial.

“The Industrial category delivered the only positive return over the 12 months to 30 June 2020, generating 1.4 per cent (FY19: 56.2 per cent). The Retail category was the poorest performing, delivering a negative 36.5 per cent return – more than double that of the previous year (FY19: negative 12.7 per cent).

“After a number of years of strong performance based on growing rents, high demand and high occupancy rates, the office category took a hit. Amidst the uncertainty, A-REITs paused investment decisions with *research showing that transactions to Q3 2020 totalled only $4.3 billion, 75% down from the corresponding quarter in 2019. Further highlighting Office REIT weaknesses was that industrial transactions outpaced Office transactions, the first time this has occurred in almost a decade.”

The S&P/ASX A-REIT 200 Index returned negative 22.1 per cent in FY20, underperforming the broader market index (S&P/ASX 200 Index) by negative 11.3 per cent.

The median premium/discount to Net Tangible Assets (NTA) for A-REIT’s in FY20 was negative 13%. This discount to NTA has been driven by the impact of COVID-19 depressing both shareholder returns and property valuations across the sector.

A-REITs continue to maintain lower gearing levels, with an average c28% gearing in FY20. This remains in line with the sectors long term gearing levels of c30%. The weighted average cost of debt for the A-REIT sector for FY20 is 3.0%.

FY20 saw $11.6 billion raised in the secondary debt and equity markets, this is up on the $10billion raised in the previous year. The largest was Unibail-Rodamco-Westfield’s raising of $6.0 billion in fixed-income offerings. Other considerable issues were Vicinity Centres’ equity offering of $1.2 billion and fixed-income offering of $0.8 billion, and Charter Hall Long WALE REIT’s follow-on equity offering of $0.8 billion.

Sebastian added that: “As the business community looks to navigate its way through the fallout of the pandemic, we’ve identified three key themes for AREITs moving forward:

Working From Home – the future of Offices?

  • Net absorption of space continues to deteriorate in both Sydney and Melbourne, office values are falling, vacancy is increasing across the country and net effective rents are declining, according to Macquarie analysts*
  • The Impact of work from home advice on commercial real estate still has some way to go in terms of what the future holds for office space in the capital cities and lease renewals / take up. It will certainly have a role to play in a revised assessment of investment strategies and portfolio structures of the REITs who play in the offices sector. Long term, although rents are likely to fall, it isn’t expected that there will be a fundamental decline in the value of office real estate, given that vacancy rates in Sydney and Melbourne have been low.
  • Rents are likely to soften on a net effective basis due to the incentives that may need to be offered to keep tenants happy. Some cities, particularly Sydney and Melbourne may also see rents decline for the first time in many years.

Where to from here for Retail?

  • The economic downturn induced by the coronavirus pandemic hit the retail sector hard. Forced lockdowns meant shopping centre and mall closures which was particularly pronounced in Victoria. Despite over $1.6 billion in rent being waived for tenants in the retail category since the onset of the pandemic, rental vacancies are at record highs.
  • One of the major risks for property investors is vacancies and COVID-19 may cause these through business bankruptcies. The retail property sector is at the epicentre of this risk.
  • The Retail REITs saw profits fall and returns were slim. Key to ongoing performance is rental rebates and their treatment on cash flow-
  • The key focus for the Retail REITs most recently has been on equity raising activity with Vicinity and Scentre Group all seeking to nurture new capital into the mix.

Sheds Still a Rising Star

  • Industrial property – in particular logistics is seeing minimal impact from COVID-19 as tenants see continued demand. Industrial REITs held their head above water and continue to deliver strong results.
  • A game changing switch to online shopping prompted by the coronavirus pandemic is driving a sustained lift in the value of industrial property, as retailers take up more warehouse space to deliver goods to customers.

The 2020 top 10 AREITS

1. Ingenia Communities Group

Ingenia Communities Group – seniors communities and holiday parks
Ingenia has a market capitalisation of over $1.3 bn.
Group’s balance sheet portfolio consists of 74 communities, Ingenia’s portfolio includes: two greenfield lifestyle community developments owned through a development Joint Venture with Sun Communities, Inc (NYSE: SUI); and nine established communities through the Group’s managed funds.

Highlights:
  • Total shareholder return of 42 per cent over one year
  • Total shareholder return of 85 per cent over three years
  • Premium to NTA of 73 per cent
  • 25 per cent increase in NTA per security to $2.89
  • Ingenia has continued to invest into acquisitions to expand the Group’s portfolio of lifestyle communities. Growth in the year has been driven by overall underlying earnings growth and favourable fair value movements on investment properties held.

Annual report insight: Like many businesses in Australia, Ingenia was adversely impacted by COVID-19. Despite operating restrictions impacting the Lifestyle Development and Holidays segments, an increase in the Group’s rental base, growth in above ground margin per new home settlement, cost management and access to JobKeeper mitigated the impact of mandatory closures on the group’s holiday parks.

2. Charter Hall Group

Charter Hall Group – Charter Hall Group (ASX: CHC) is an integrated property group that manages listed and unlisted property funds on behalf of wholesale, institutional and retail investors. Assets are mixed: office, industrial, retail and social infrastructure

Highlights:
  • Total shareholder return of 98 per cent over three years
  • Premium to NTA of 139 per cent
  • Operating cash yield of 20 per cent
  • CHC – Despite COVID-19, CHC saw “resilient and growing income streams” - achieving an operating cash yield of 20%. CHC has also been able to grow their funds under management through acquisition activity (completed $8.3bn in acquisitions) and favourable valuation movements.

Annual report insight: Charter Hall’s strategy of investing in long WALE assets leads to defensive and resilient portfolios. While Charter Hall has not been immune to the effects of COVID-19, the impacts have been limited through our focus on assets with long leases to high quality tenants in predominantly defensive industries. Small to medium enterprises (SMEs) represent only 10.2% of tenants across the funds platform, a much smaller proportion than other listed REITs. More broadly, COVID-19 has seen accelerating demand for access to industrial & logistics assets, something we have actively pivoted towards.

3. Centuria Industrial REIT

Centuria Industrial REIT – CIP is Australia’s largest domestic pure play industrial property investment vehicle (A-REIT) and is included in the S&P/ASX 200 Index. CIP’s portfolio includes 53 high-quality, fit-for-purpose industrial assets worth a collective $2.1billion*. The assets are situated in key in-fill locations and close to key infrastructure.

Highlights:
  • Total shareholder return of 10 per cent over one year
  • Total shareholder return of 51 per cent over three years
  • 75 per cent tax advantaged distribution
  • Premium to NTA of 15 per cent
  • Given industrial, CIP remained resilient through COVID due to the “defensive nature of occupiers being essential services and the ongoing tailwinds from e-commerce”
  • CIP grew both organically, with investment property valuation increases and inorganically, through the acquisition of seven industrial assets (total value added through acquisition: $300m)

Annual report insight: Centuria continues to focus on portfolio leasing to ensure occupancy and income are maximised, active asset management, risk mitigation and repositioning strategies. Through the expertise under Centuria management, CIP has achieved critical scale to become Australia’s largest pure-play industrial REIT with a $1.6bn portfolio, whilst significantly de-risking the platform through active asset management, repositioning and strengthening the balance sheet.

4. National Storage REIT

National Storage REIT – self-storage assets – rented directly to customers https://www.afr.com/property/commercial/national-storage-reit-bulks-up-conditions-improve-20200826-p55pg9

Highlights:
  • Total shareholder return of 10 per cent over one year
  • Total shareholder return of 40 per cent over three years
  • 172% unannualised liquidity
  • 22 acquisitions made in FY20 (total deal value of $218m) – entering new markets and expanding existing Melbourne & Sydney coverage.

Annual report insight: Over the last 12 months our results have continued the robust growth trajectory of previous years, growing revenue from $159 million to $178 million, with slightly reduced occupancy - despite some significant operating constraints as a result of the COVID-19 pandemic. Pleasingly, occupancy has rebounded strongly post the first wave of COVID-19 and this growth has continued through July and early August 2020. The strong performance of our business through the COVID-19 pandemic further demonstrates the resilience of self-storage as an asset class and the proactive capability of the NSR team in responding quickly and effectively to such challenges.

5. Goodman Group

Goodman Group - global industrial property group that owns, develops, and manage modern industrial real estate including logistics facilities, warehouses and business parks in strategic locations throughout 17 countries.

Highlights:
  • Total shareholder return of 100 per cent over three years
  • Premium to NTA of 167 per cent
  • Operating cash yield of 10 per cent
  • 9 per cent increase in NTA per security to $5.84
  • Goodman was well positioned as an industrial property player with their customers and the broader logistics and warehousing sector globally. The accelerating trend of e-commerce , move to remote work arrangements, rising demand for technology and big data has further propelled Goodman in FY20.

Annual report insight: Over the past decade, the Group has developed significant expertise, financial resources and a well-located property portfolio to sustain it through various market conditions. These strong foundations were evident in our FY20 results with operating performance ahead of guidance. Customer demand for strategically located space in our $51.6 billion portfolio increased during the year. Occupancy remained high and rental growth was steady across several industry segments, particularly those involved in consumer staples, e-commerce and data storage. This strong customer demand is positively impacting our development business, where work in progress has increased 59% on last year, to $6.5 billion, and is forecast to exceed $7 billion in the first half of FY21.

6. Waypoint REIT

WayPoint REIT – Waypoint REIT (formerly Viva Energy REIT Ltd) is Australia’s largest listed real estate investment trust (REIT) with a market cap of $2 billion. It owns a portfolio of service stations around Australia, with more than 400 Shell-branded service station properties around Australia. Waypoint REIT’s properties are typically operated by Coles Group Ltd (ASX: COL) as Coles Express service stations.

Highlights:
  • 126% unannualised liquidity
  • Operating cash yield of 8 per cent
  • Total shareholder return of 6 per cent over one year
  • Total shareholder return of 33 per cent over three years
  • Premium to NTA of 15 per cent
  • Waypoint has not been materially impacted by COVID-19 and remained resilient. Waypoint have also made a number of acquisitions within the period.

*Annual report to be published in December 2020

7. Cromwell Property Group

Cromwell Property Group – mixed asset spread across a range of sectors including Office (66.2%), Retail (15.5%), Industrial/Logistics (12.2%)

Highlights:
  • 8 per cent distribution return
  • 69 per cent tax advantaged distribution
  • Operating cash yield of 8 per cent
  • Key reason Cromwell was in top 10 was due to a strong shareholder distribution. They have also noted that despite COVID-19 they have strong tenants who are predominantly government or ASX listed entities.

Annual report insight: Given our strong tenant skew towards government and larger ASX-listed entities, rental collection was relatively unimpacted by COVID-19. In our Australian portfolio, the Government’s Code of Conduct applied to 93 SMEs representing less than 10% of gross passing income and a total of $9.6 million was waived or deferred between March and 30 June 2020, representing less than 4% of total rent.

8. BWP Trust

BWP Trust - is the largest owner of Bunnings Warehouse sites in Australia, with a portfolio of 68 stores. Seven of the properties have adjacent retail showrooms that the Trust owns, and are leased to other retailers.  The Trust also owns four large format retail showrooms, has one large format retail showroom under construction, and currently has two vacant properties.

Highlights:
  • Premium to NTA of 29 per cent
  • Total shareholder return of 9 per cent over one year
  • Total shareholder return of 47 per cent over three years
  • Delivered a strong result in the year despite COVID given Bunnings is a necessity for workers despite the pandemic. BWP does however have a portfolio with a small number of tenants (such as gym operators) who were subject to mandatory closures from which they received rent abatements.

Annual report insight: Throughout the financial year, Bunnings has been able to operate on an unrestricted basis from all of the properties leased from the Trust, as have the significant majority of the Trust’s other tenants. The Trust has leases with a small number of tenants such as gym operators that were subject to COVID-19 mandatory closure by Federal or State governments for some, or all, of March, April, May and June this year. A Code of Conduct was legislated in each state which stipulated how landlords and tenants should cooperate during this period. For tenants that qualified under the relevant Code of Conduct legislation, arrangements were put in place for the abatement of rent in accordance with legislation. Rent abatements totalling $435,886 were granted in the period ended 30 June 2020. The Trust received 98.8 per cent of rent due during the months of March to June this year, taking into account the COVID-19 impacts.

9. Centuria Office REIT

Centuria Office REIT - COF is Australia’s largest pure play office REIT (A-REIT) and is included in the S&P/ASX300 Index. COF has a geographically diversified portfolio of 23 high quality assets with a value of $2.1 billion*. The portfolio is predominantly exposed to metropolitan and near city office markets that are well connected to transport and lend themselves to affordable rents.

Highlights:
  • 9 per cent distribution return
  • 80 per cent tax advantaged distribution
  • Operating cash yield of 8 per cent
  • Despite poor share price performance, Centuria Office REIT was able to rank well in this year’s survey due to their strong shareholder distributions.

Annual report insight: Throughout FY20, Centuria has maintained its dual strategy of growth by both direct real estate transactions as well as corporate acquisitions. The latter most recently included the settlement of a 63% interest in Heathley Limited (September 2019), which has since re-branded to Centuria Healthcare. This year Centuria also completed a full takeover of Augusta Capital Limited, a leading New Zealand property funds manager with $1.8 billion in assets under management.

10. APN Convenience Retail REIT

APN Convenience Retail REIT - APN Convenience Retail REIT is a listed Australian Real Estate Investment Trust (ASX code: AQR) that wholly owns a portfolio of 80 service station and convenience retail assets located across Australia with a skew towards the eastern seaboard, independently valued at $455 million.

Highlights:
  • Total shareholder return of 16 per cent over one year
  • Premium to NTA of 10 per cent
  • 10 per cent increase in NTA per security to $3.27
  • Their portfolio of assets are defensive and is linked to non-discretionary spending. Service stations and convenience retail properties remained open and a minimal impact of COVID on trading. In addition, over FY20 AQR committed to $90.2m of property acquisitions.

Annual report insight: The portfolio continues to be resilient in the midst of the COVID-19 pandemic, with all sites remaining open and trading and with minimal impact on rental income. We expect service station and convenience retail properties to remain highly sought after as a stable and defensive asset class due to their long leases and strong lease covenants. The portfolio is well diversified by geography, tenant and site type. It is underpinned by long-term leases to high quality and experienced global operators, with 97% of the rental income derived directly from major service station tenants. The portfolio remains 100% occupied and is supported by a long weighted average lease expiry (WALE) of 10.6 years as well as an attractive lease expiry profile with 74% of rental income expiring in FY2030 and beyond, providing securityholders with a strong level of income security.

The survey, now in its 26th year, ranks the S&P/ASX 200 A-REIT Index trusts based on key financial and investment indicators in the 12 months to 30 June each year.

*source: Colliers International