Australian real estate investment trusts thumped the broader equities market in 2014, growing their interim distributions and confirming 2015 full-year distribution guidance.
The S&P/ASX 200 A-REIT Accumulation Index delivered a total return of 27 per cent for the calendar year compared with a 5 per cent gain across the broader S&P/ASX 300 Accumulation Index.
Analysis by The Australian Financial Review shows that 12 of the 16 trusts that make up the S&P/ASX 200 A-REITS Index grew distributions for the six months to December 31, with Stockland unchanged and Abacus Property Group the only trust yet to announce its half-year distribution payout.
Comparisons were not possible for the two restructured Westfield trusts, Scentre Group and Westfield Corporation, which both met their interim distribution forecasts.
Retail landlords Federation Centres and BWP Trust and the diversified Charter Hall Group all grew distributions by more than 10 per cent, with solid growth also posted by Goodman Group and DEXUS Property Group.
Stockland, which brought distributions back in line with earnings in 2014 and is targeting a more sustainable lower payout ratio in 2015, maintained its interim distribution at 12¢ per security.
Mall landlords Charter Hall Retail Trust and Novion Property Group both grew distributions marginally amid tougher conditions in the retail sector.
“We are pleased to announce this increased distribution, which reflects the resilience of the REIT’s portfolio in the current retail environment,” said Charter Hall Retail REIT fund manager Scott Dundas.
Novion forecast a full-year distribution of 13.8¢ – up from 13.6¢, with chief executive Angus McNaughton saying the trust was “cautiously optimistic about a gradual improvement in the retail environment and expects comparable retail sales growth to steadily improve over the remainder of this financial year”.
Grant Berry, director at fund manager SG Hiscock and Company, said the interim distribution payouts indicated the A-REIT sector had performed very well over 2014, despite challenging operating conditions including rising vacancies in CBD office markets and tough leasing conditions in retail.
ROBUST RESIDENTIAL VOLUMES
Robust residential sale volumes supported diversified A-REITS such as Mirvac and Stockland, Mr Berry said, while Westfield Corporation, which has 70 per cent of its asset base in the US, benefited from the weaker Australian dollar.
“A-REITs were able to increase earnings and distributions without making material changes to payout ratios,” he said. Investing in new developments, growing external funds management operations, M&A activity and achieving lower debt costs were some of the ways A-REITS grew distributions in 2014.
Other factors which contributed to distribution growth, Mr Berry said, were a limited number of equity capital-raisings, which “typically act as a funding drag on returns” and declining long-term interest rates, combined with competitive margins, which assisted refinancing.
”There was also some cash returned from the DEXUS takeover of the Commonwealth Property Office Fund, from the sale of the Australand Group – an all cash takeover by Singapore-based Frasers Centrepoint – and a capital return from Westfield Retail Trust as it restructured into Scentre Group,” he added.
“We are pleased that A-REITs have in general maintained discipline with regard to payout ratios and gearing. There is always the temptation to increase payout ratios and gear up given lower interest rates and availability of debt capital,” Mr Berry said.
Cromwell Property Group, DEXUS, Investa Office Fund, Mirvac, Novion and Stockland all confirmed full-year guidance.
“Given the relatively short time-frame and the shift down in long-term interest rates, we see limited risk in earnings guidance not being met. More than likely it will be exceeded. With regard to distributions there is even less risk of this not being achieved as managers can always adjust payout ratios,” Mr Berry said.
More than half of the trusts in the S&P index have active distribution reinvestment plans for interim payouts. These are generally offered when securities are trading at a premium to net tangible assets or at fair value.
“The A-REIT sector started the year at a modest discount to our internal net asset value (NAV) calculations of around 3 per cent with some undertaking buybacks,” Mr Berry said.
“They have finished the year at a premium of about 10 per cent to NAV according to our calculations.
“We would expect 2015 to have some tailwinds from low long-term interest rates, offset by soft property operating conditions in Australia.”