With all of the 1H 2019 AREIT results revealed, it is now clear just how unloved the retail sector is with those REITs trading at the greatest discount to NTA, all heavily exposed to the retail sector.
The net tangible assets (NTA) value of a REIT is the net balance sheet value of the underlying properties and a REIT which trades at a premium is considered to be overvalued and it they trade at a discount, clearly they are undervalued. Understanding the reasons for the premium or discount is important when considering any property investment strategy.
The overall REIT market is currently trading at an average premium to NTA of +8%*.
Of the sub sectors the average premium within each sector is;
For the 1H 2019 reporting season, the A-REITs with the highest discount to NTA* are;
Elanor Retail Property Fund -15%
Carindale Property Trust -12%
Blackwall Property Trust -2%
Based on the above results, it is clear that the market is still not willing to price the shopping centre REITs at their fair value. The poor performance of their major tenants, the ongoing threat from on line retailing and the potential for further sales decline given changing consumer sentiments are all likely to impact future book values or the income potential of these assets in the year ahead given and the risk to trade at NTA is therefore to great.
Typically, REITs trading at discounts to NTA are potential acquisition targets, however there are few on this list that would be attractive at the present time. Some of the REIT's trading up to an 8% premium may still look attractive considering some of last years take overs were ultimately traded at up to 15% premiums to NTA.
As for the specific REIT's, Vicinity continues to be hampered by a large number of non core assets and whilst a portfolio sale was completed last year, Vicinity have been unable to close a prospective $1bn wholesale fund, earmarked for late last year. These assets will likely have an ongoing drag on performance until resolved.
The Elanor Retail Property Fund is predominantly a Sub Regional Shopping Centre fund with assets mostly in regional locations, with several in the process of being re-positioned. Four external valuations as at Dec-18 revealed a declined of $5M in value, however the groups' three internal valuations (2/3 by value) improved by $6.7M, placing some doubt on the real NTA of the fund.
Stockland are being squeezed by a combined assault on retail and residential markets however the group made a strategic decision in 2010 to sell their commercial and industrial land holdings and to focus on the 3 R's, retail, residential and retirement.
Stockland and Vicinity's response to the large discount to NTA is to buy back shares to boost the dividend yield and improve the NTA discount however both REITs are also forced to sell assets to realise the inherent value of the portfolio (& to justify the remaining value) and to look for capital partners to co-invest in their assets.
Carindale and Scentre avoided referring to NTA or changes in valuation in their year end presentations and instead focus on improving operating incomes, sales growth, and development initiatives. A look at the financial results showed that Scentre improved Net Assets last year by $1.1Bn however they also invested a similar amount in expansion and redevelopment capital expenditure.
Blackwall Property Trust holds interests in two trusts managed by Blackwall and is likely to be trading at a discount due to the relatively small size of the trust and the fact that the major asset, the Bakehouse Quater is being held at a price equal to the value of the sale of that asset to Yuhu Group which has some remote degree of uncertainty to its completion. The failure of that deal to proceed may reduce the value of the underlying assets.
The remaining retail sector REIT's are focused on Neighbourhood Centres and are trading at a premium to NTA. Charter Hall Retail REIT is trading at a 10% premium to NTA and Shopping Centres Australia are trading at a 9% premium to NTA. These Centres are typically less prone to the structural challenges facing the bigger landlords and are now well positioned to add to their portfolio.
Next week we will review the REITs trading at the highest premiums to NTA.
* Based on the closing price on 8/3/2018 and excluding Charter Hall and Goodman and Lend Lease who generate substantial revenues from funds management and other operating divisions