Income Report / Income Note: Should we increase our property exposure? (CLW, ABP, GPT, GMG)

By Market Matters 22 July 20

Income Note: Should we increase our property exposure? (CLW, ABP, GPT, GMG)

Market Matters Income Report 22nd July 2020

A weaker session for the ASX today giving back nearly half of yesterday’s impressive gains. The Australian dollar has remained resilient this morning in the face of the declines trading up above US71c. The only semblance of green today is shown through the energy stocks which are being supported by strength in the oil price overnight plus we’ve seen a strong production scorecard out from Beach Energy (BPT), the stock up 4.5%. Oz Minerals (OZL) is also performing well after releasing their production figures this morning, this is our biggest overweight in the MM Growth portfolio and the stock is now trading at 9 year highs, up 3% to $13.36. We remain bullish both names.

The ASX 200 is currently trading down -66pts/-1.09% to 6089.

ASX 200 Chart

The Income Portfolio had a strong week, piggybacking off a rally in equity markets to post a positive return of 1.93% through the 5 sessions. No dividends were paid during the week so performance was carried by capital gains in IGL (IGL +10.39%), Perpetual (PPT +6.74) and Abacus (ABP +6.18%) while the exposure to energy in Woodside (WPL -3.73%) was the main drag. The portfolio continues its good start to FY21, now up 3.03% with the benchmark (RBA + 4%) sitting at 0.23%. Since inception the portfolio has added +11.08 vs. the benchmark of +15.83%. 

Income Note: Should we increase our property exposure?

I was presenting to the board of an Australian charity I manage on Saturday over Zoom and one board member asked the question, should we be using currently depressed prices in listed property to increase our weighting towards the sector? A very sensible question and one that I’ll cover today.

The positives for property include:

-       Low interest rates, with the expectation that rates will stay low for an extended period of time

-       The dividend yield of the sector is more than 4% above the 10 year bond yield versus its long term average nearer 2% (it was around 6% in March)

-       Some stocks are already trading at a steep discount to their asset values, suggesting the market has already priced in downward revisions to property prices.

-       History shows that property stocks perform well in volatile markets

The negatives for property include:

-       Earnings are under pressure in some areas from rental relief, and will likely fall further in FY21

-       Some areas have structural challenges, office and retail the obvious ones to highlight but there are others

-       The carrying value of assets are generally being revised lower, lower asset values = higher gearing  

-       Interest rates will go up at some point, which will provide a headwind when they do

The performance of property has been weak in both an absolute and relative sense this calendar year. The Real-Estate Investment Trusts (REITs) are down nearly 20% while the ASX 200 is down around 8% for the period with all of that pain being felt in March, the sector fell 14.5% more than the broader market during that month and while they’ve bounced back marginally ahead of the market overall, the outperformance has only been slight and there’s been a big variance in terms of individual performances.  

ASX 200 (white) v ASX 200 Property Index (orange)

One of the obvious trends is that quality over and above valuation is winning out. Quality in terms of balance sheets and importantly, the quality and predictability of earnings. For example, an industrial property that underpins the supply chain for online shopping has more earnings certainty right now than a bunch of speciality retailers operating in a regional shopping centre.

Overall, MM is cautious on property however there are some interesting opportunities if we dig deeper

In March, most property companies withdrew their earnings and dividend guidance. Since then some have reinstated the previously pulled numbers, a couple have reduced guidance while the vast majority have kept their guidance withdrawn. In terms of revaluations across the sector, industrial has seen increases in valuations while office has seen small reductions of between 0-2%, retail on the other hand has been hardest hit in some parts, with Vicinity (VCX) who has more regionally focussed retail properties revising values down around 11-13% while SCP, which has higher quality retail assets has announced devaluations just shy of 3%.

Below MM looks at 3 property stocks  

1 Charter Hall Long WALE REIT (CLW) $4.49

This REIT invests in properties with long dated leases in place, generally with Government and other secure tenants with a weighted average lease expiry of ~14years. It holds a diversified portfolio of nearly 400 properties which is spread across industries, geographies and property types. This sort of REIT is at the lower end of the risk spectrum while offering a forecast unfranked yield of 6.71%. Like many stocks on the ASX, CLW pulled guidance around COVID however they have since reinstated their forecast which was unchanged on pre-covid numbers. They also reported zero change in underlying property values and importantly, gearing is low at just 20%

MM likes CLW as a low risk yield investment

Charter Hall Long WALE REIT (CLW) Chart

2 Abacus Property (ABP) $2.68

The last 12 months or so has been a transition period for ABP which is selling off its non-core assets to concentrate on office and more importantly, self-storage which MM thinks has merit. This transition has created some short-term headwinds for earnings while the market is also concerned about the shorter term nature of their leases across the office portfolio.

ABP already resides in the MM Income Portfolio with the position showing a paper loss of 27%, however we expect better times ahead for this property company. With a forecast yield of 6.82% unfranked over the next 12 months and like CLW, gearing is not an issue for ABP while it’s also trading at a sharp 22% discount to the value of its assets.  

NB ABP holds an ~8% stake in National Storage REIT (NSR)

MM remains bullish ABP

Abacus Property (ABP) Chart

3 GPT (GPT) $4.15

GPT is another diversified property company with retail, office and logistics properties along with their own WeWork equivalent called Space & Co which provides co-working spaces, an area that has taken a hit. They’re at the pointy end of Melbourne lockdowns with more than 40% of their retail exposure in Melbourne and around 30% of their office assets – clearly an area that is doing it tough.

GPT is expected to yield 6.38% over the coming 12 months and is trading at a steep 30% discount to the value of its assets making it deep value at current levels, clearly the market is pricing in more pain to come.

While we think GPT is cheap, we’d like it more below 4.00

GPT (GPT) Chart

Worth also mentioning Goodman Group (GMG) which has been a phenomenal performer. This is a company we are bullish on however it doesn’t fit into an income focussed portfolio, yielding just 1.90%.

Goodman Group (GMG) Chart

Conclusion (s)

MM sees value in select property stocks, liking CLW and ABP here, and GPT into further lockdown induced weakness
MM would consider adding to its property exposure for our income focussed portfolio

Have a great day!

James, Harry & the Market Matters Team


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