As mentioned in many past editorials the landscape of the Aussie LPT market has changed a lot over the past few years. No longer is this a sector that can be considered boring but safe, with income streams coming from property rents. Nowadays you have a new but entrenched breed of LPT’s, the stapled LPT.
This is an internally managed vehicle where the stapled entity comprises securities in two vehicles, a property trust and an operating business. You cannot trade the securities separately. When you buy a unit in a stapled entity you are not just buying only a boring but safe rental income stream, but you are also buying an interest in an operating business.
It is the operating business that can have the biggest impact on both the risk and income profile of an LPT. However the not all stapled LPT’s are the same. Each has different business and different risk profiles. The risk profile of all Stapled LPT’s is definitely not the same. Let us compare three stapled LPT’s, Multiplex (MXG), Centro (CNP) and Deutsche (DRT). Each has a different risk profile and each trades at differing premiums to NTA.
At the riskier end of the spectrum is Multiplex. The business component comprises, development, funds management and third party construction. It is the later which is high risk and that risk came home to roost in 2005 and has been the malaise that has devastated the value of this entity for long term unitholders. They now trade at a 29% premium to NTA after being at a significant discount throughout much of the past 18 months. This compares to the 115% premium to NTA that Multiplex was trading at at the end of January 2005, before the flag of the Wembley disaster began to unfurl.
At the other end of the spectrum is Deutsche (DRT). They merged three externally managed LPT’s and internalised the management. The company primarily undertakes the property management functions for the trust properties and does third party property management. In addition there is a small funds management operation that primarily manages wholesale direct property funds. Both of these operations are considered to be low risk annuity style income streams. If they loose any management contract, they loose an income stream but not capital.
Neither of these business have been growing since they became a stapled entity. Deutsche trades at a premium to NTA of only 2.6%, the lowest premium to NTA of all stapled LPTs and below that of many externally managed LPT’s that are considered boring but safe.
Then there is Centro (CNP), a company on a stellar growth path. The business arms are property and facilities management of their retail centres with some development activity (primarily redevelopment of existing centres). The main business is funds management. They have just launched their latest syndicate comprising a billion dollars of property. Given that Centro is also a co-investor in many of the funds this is really low risk annuity income streams. Centro is currently trading at a 115% premium to NTA reflecting the growth prospects of it’s business. So far Centro has not failed to deliver.
The differences in the levels of risks and returns of these three stapled entities can be evidenced by the following unit price chart.
For those investors who want a diversified portfolio of property asset classes, the best bet is a diversified LPT. However 80% of diversified LPT’s are stapled LPT’s and come bundled together with some degree of business risk. If you want to lower your risk by increasing property sector diversification you are however likely to increase the risk by adding a business risk component.
One stapled LPT that warrants a mention is Macquarie Goodman Group. MGQ is trading at a massive 235% premium to NTA. It is on the acquisitions warpath in both Australia and overseas and is buying property related business as well as properties. If it keeps going on that path it may not be long before it becomes an industrial stock and drops out of the LPT index. The business’ they are buying and growing are relatively low risk but the market appears to be pricing some pretty exceptional growth into the unit price. The average LPT trades at a 5.7% premium to PIR’s valuation but MGQ trades nearly fives times that premium at a 28.6% premium to PIR’s valuation.
In contrast to the externally managed LPT’s not one of the stapled LPT’s in the table comprise solely overseas property. Whilst many do contain some overseas property (and that portion is growing) on the whole most offer a property exposure currently significantly weighted towards Australian property.
Most of the stapled LPT’s trade at a greater premium to NTA reflecting the growth potential of the business component.
Note that the figures are PIR’s forecasts as at the end of August 2006.
By comparison to the externally managed LPTs, this stapled group is trading at a 12 month forecast yield of 6.6% compared to 8.2% for the overseas externally managed LPT’s and at a 4.9% premium to forecast 5 year distribution yield compared to 2.2% for the overseas externally managed LPT’s, whilst for the externally managed Aussie LPT’s these figures are 6.5% and 3.6% respectively.
Investors should be aware that many are trading at prices that are reflective of the growth potential of the business component, despite the fact that this component is still the minority source of income for the majority of the stapled LPT’s.
So as can be seen, not all stapled LPT’s are the same. To lump them into the same boat for comparison is to often compare apples with oranges. Some are nearly as boring and safe as many of the externally managed LPT’s and some are definitely not boring and some are definitely not safe!
CHC has been the best performing trust over the last 12 months partly as a result of the market valuing the Funds Management businesses at increasingly higher multiples.
The worst performing LPT over the last 12 months has been RAT (0.4%), which has been on a downward slide since August last year, driven predominantly by steadily increasing interest rates in the US, and more recently, market expectations for higher interest rates in Australia.
By John Welch, head of research, Property Investment Research.*
