Can these ASX-listed REITS bounce back?

And just like that, pharmaceutical behemoth Pfizer (NYSE:PFE) seemingly comes through with the goods, announcing a 90% effective COVID-19 vaccine. Global markets rejoiced, punching the air in delight screaming ‘pandemic over’. First Joe Biden is elected, the US rejoices in happiness, and now this. It could not get any better. As Bob Marley would say, “the sun is shining, the weather is sweet.”

Markets across the world have all reacted in similar fashion by selling pandemic winners such as
e-commerce, buy-now-pay-later and technology stocks and buying pretty much everything else, that is travel companies, airlines, airports, infrastructure, property and banks. In this article, we select three property ‘pandemic recovery’ stocks that may benefit from this rally. Looking across the real estate investment trusts (REITs) listed on ASX, the assets owned can be broken down into five distinct groups, ordered by the hardest-hit during the pandemic to the least: 1. Shopping centres (consumer discretionary retail), 2.Office towers (office), 3. Housing and apartment developers (residential), 4. Distribution centres (industrial) and 5. Small neighbourhood centres (consumer staples retailing). The pandemic saw the REIT index drop by 42% from top to bottom during March. Here are some property stocks and the % fall from high to low in March.

Logically, sectors with the greatest upside potential will be those suffering most from the pandemic, unless of course they are damaged forever. A relief rally should see large swings in their share prices.

1. Shopping Centres – Scentre (ASX:SCG)

Scentre Group is a shopping centre giant with retail destinations operating under the Westfield brand in Australia and New Zealand. Shopping centres were hit hard. Suffering on a global scale, the pandemic forced people to bunker down at home in isolation, all but reducing foot traffic to nothing. Retail stores were left to fend for themselves and either shifted online or shut up shop, causing vacancies and business bankruptcies to retail property groups. Fast-forward to today and the sector is at a turning point.

Shares in SCG hit a Coronavirus low of $1.36 (the pre-Coronavirus high was $4.08) in March and have been trading at around the $2.30 mark since. The company issued an operational update this month. All 42 Westfield Living Centres are open and roughly 92% of retailer stores are open and trading (including Victoria). To further highlight this, during the 10 months ended 31 October 2020, the group collected $1,621 million of rent, an increase of $746 million since 30 June 2020. Customer visits during the September 2020 quarter were 90% of the same time last year across the portfolio (excluding Victoria). Portfolio occupancy was 98.4% at the end of September 2020. Clearly, the company is on the road to recovery.

What about distributions and debt?

Scentre cancelled its second half dividend, but previous levels, running at 23 cents per share, would give it a dividend yield of 8.33% at the current share price of $2.76. Is that yield sustainable? In its recent update, Scentre said that it “now has sufficient long-term liquidity to cover all debt maturities to early 2024.” It also has a net operating cash surplus of $261 million and available liquidity of $4.4 billion. In the recent update, management confirmed their intention to reinstate the dividend in early 2021, barring “unforeseen circumstances,” so it may just be.

Broker views

Morgan Stanley has a ‘buy’ recommendation with a target price of $2.65. The commentary comes on the back of the group’s 3Q trading report. It noted that “rent collections at 85% for the quarter versus 48% in the second quarter.” That means leasing activity has ripped right back to “normal levels with lease structures in line with the pre-COVID deals”. 

2. Office retail – GPT Property Group (ASX:GPT)

The GPT Group is a REIT that invests in primarily office (40%), logistics (20%) and retail (40%) assets. The retail segment includes regional and sub-regional shopping centres, while the office segment comprises “prime” central business district office properties including some associated retail space, as well as GPT’s equity investment in GPT Wholesale Office Fund. The logistics segment manages logistics and business park assets. While GPT isn’t a pure-play office retail, it still has a significant exposure to it.

At the company’s HY results, GPT said it was negatively affected by COVID-19 and the introduction of the “commercial tenancy Code of Conduct requiring landlords to provide rental relief to qualifying tenants impacted by the government measures. GPT provided relief to some tenants whose businesses were been significantly impacted.” As a consequence, rent collection from tenants fell sharply in the second quarter. Funds from operations (FFO) for the six-month period was $244.5 million. Like Scentre Group, the company’s retail assets declined in foot traffic and speciality sales in the second quarter. Despite all this, GPT says that its “portfolio occupancy remains high at 98 per cent.” Encouraging signs in enquiry levels for unoccupied spaces give the group confidence that the retail and office portfolios are well in recovery.

“GPT has a strong balance sheet and a high level of liquidity that ensures that it is well-positioned to continue to execute on our strategy,” it says. The company declared an interim distribution of 9.30 cents in August, after cancelling the first-half payment, but didn’t provide FFO or distribution guidance for the full year 2020.

At the time of writing, shares in GPT Group are trading at $4.71 up almost 10% on the day. Pre-COVID, the REIT was trading around the $6.33 mark.

Broker views

UBS has a ‘buy’ recommendation with a target price of $4.50. The broker says rent collection rates for the September quarter were 90%. “Office and logistics occupancy was maintained at 94.1% and 99.8%, a better outcome than anticipated.” The market is not seeing Melbourne’s rebound potential.

3. Housing and apartment developers (residential) – Mirvac Group (ASX: MGR)

Mirvac is one of Australia’s largest diversified Australian REITs. MGR’s property portfolio is skewed towards office, accounting for around 60%, with a substantial 31% of its assets in retail and the remainder (8%) in industrial assets. Mirvac says its residential pipeline is strong, with 27,551 lots amounting to $13.9 billion worth of projects. Clearly residential property and office real estate isn’t in hot demand at the moment, and hasn’t been for the majority of the year. The pandemic and lockdown destroyed buyer demand and made it impossible for buyers to inspect new residential properties. As a result, the MGR share price took a beating, falling by almost 50%.

Faced with headwinds in both directions, office and retail, Mirvac was under heavy pressure to hold out and survive. At its recent operational update, the company said, “Despite disruptions, we have successfully maintained continuity across the business and set the foundations for recovery in the financial year ahead. Rent collection rates across the group averaged 82 per cent for the quarter 1, with Retail the most impacted.”

Mirvac didn’t provide earnings or distributions guidance for FY21 but said it was targeting “a payout ratio of 65-75 per cent of FY21 operating earnings  in line with the Group’s distribution policy to pay up to a maximum of 80 per cent of operating earnings.” While the pandemic has been a real challenge for the retail and office portfolios, the company is seeing customers returning to those centres where they feel it is safe to do so. “Lower foot traffic (retail) and more remote working (office) looks likely to slash demand from tenants in the coming years. However, Mirvac did report a 5.9-year weighted average lease expiry (WALE) in February. The long-term nature of those leases could mean the REIT’s earnings withstand the short-term impacts from the pandemic.”

Mirvac has 6.7 years debt maturity, with minimal expiries until FY23. With $1.4 billion in liquidity and a 22.8% gearing level, brokers are confident the company has seen the worst of this storm and should rebound swiftly.

Broker views

UBS has a ‘Buy’ recommendation with a target price of $2.72. The broker says September quarter residential sales were up 53% on the corresponding period. They see this strong momentum continuing through to the end of the year. The Victorian first-home-builder grant together with federal tax relief should provide support. UBS forecasts a full year FY21 dividend of 10.20 cents and EPS of 14 cents.

As they say in the middle of a pandemic, pick your poison, but always be wary of the downside.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.