AREITs in the time of covid
SG Hiscock's Grant Berry explains how real estate was affected by the pandemic, how property stocks coped, and the chase for income in an evolving retail landscape.
Lex Hall: Hi, I'm Lex Hall from Morningstar. Grant Berry overseas the Property Income Fund at SG Hiscock. I thought I'd catch up with him today to talk about the fund, which primarily invests in Australian real estate investment trusts.
Welcome again Grant to Morningstar.
Grant Berry: Thank you.
Hall: Let's have a look at three stocks in the portfolio in particular, and let's start off with GPT Group. Tell us why that holds such an integral part in your fund.
Berry: Well, GPT Group is the oldest REIT. It's been around for many years since 1970 when I was born. And it's a good bellwether REIT for the sector. It's a diversified REIT. Approximately 40 per cent is office, 40 per cent is retail and 20 per cent is industrial. So, it's a diversified portfolio. They own a quality portfolio of good assets. They've got a good balance sheet as well. Their gearing was relatively modest coming into COVID. I think it's a really interesting stock because you can look at where it was pre-COVID and where they are today and also going through COVID, there's an interesting story there.
So, pre-COVID the stock had a security price of between $5.50 and it actually got up to around $6, north of $6. It had an NTA at the time of $5.80. That is the value of the assets in the, if you like, value by value. So, it's trading around that NTA. In fact, at one stage it got to (indiscernible) NTA. They raised equity in 2019 as well and they reduced their gearing somewhat. We get to December '19 and they pay a half year distribution. It was 13.37 cents for that half-year period. Then we get COVID. COVID had a very significant impact on the REIT sector as you were shutting down assets. The security price fell all the way down into the mid-$3 range. So, it essentially halved. The group had a good balance sheet. Pleasingly, that was the balance sheet that navigated itself through COVID, and they didn't have to raise dilutive equity.
As we've progressed through the year, as I mentioned before, they worked through all their tenants, the rent collections came in and things have turned out quite well. They didn't raise equity. And we get to December '20 and they paid out 13.2 cents distribution. So, essentially, we're talking about the same level of distribution to what it was in December '19. But the security price is still, even looking at the screen today, around $4.60. So, it's at a discount. So, the yield now is north of $6. And interestingly, I mentioned before, they were raising equity pre-COVID. Now, because they are at a discount, they are actually buying back their own securities. And this is why we find this a very interesting story. It's a quality portfolio with a good balance sheet, well-run group, and now, it's priced at a discount and they buy back their own stock and you're getting a good yield. It is good value. I mean, the value of their assets independently valued by independent valuers is $5.57. But essentially, what we're seeing with the retail values is they're now holding up quite well. So, I think, it is actually at discount, and management certainly agree with me because that's why they're buying back their own stock.
Hall: Okay. Second name on the list, Scentre Group, also Morningstar has it fairly valued. It's synonymous with Westfield. Tell us a little bit about why it's such a prominent figure in your fund.
Berry: Look, again, when you look at Scentre Group and their portfolio, they have an awesome portfolio. They own seven of the top malls in the country and they're also in New Zealand and they own the top malls over there as well. So, they have a fantastic portfolio. You just couldn't assemble a portfolio of that quality to start with. It is trading at a discount. Their NTA is $3.63 and the stock is trading below $3. It was hit very heavily by the impact of COVID and shutting down these assets as we all know, and the security price fell very, very significantly. Their gearing was seen by the market as being a bit more elevated. So, the market put concerns that they could raise equity through the crisis.
Hall: That's just for real estate – retail investors, I should say, debt to equity is quite an important ratio there, isn't it?
Berry: It is, but the most important ratio in terms of Scentre Group is your ability to service your rent and therefore cash flow, and they've always been able to service that. They've got interest covenant also for three times. So, it's well covered there. And they've got a credit ratings interestingly on negative at the moment. I see that there's scope for those to actually improve. But what I saw, and I think they're really a good example of a well-managed REIT through this crisis, because it was very difficult for them is, the first thing they did was shore up liquidity. So, they basically drew down their lines and made sure that they had sufficient liquidity to get themselves through. They also took a very proactive stance with their tenants to help the tenants through this very difficult period. Obviously, you had to deal with the SME tenants, but essentially, to keep that full occupancy so the tenants would be on the other side. So, they did well with that. And now, we're coming out the other side of the crisis, they haven't raised equity, they're collecting all their rent, they're still at a discount. They've dealt with their balance sheet concerns or effectively coming up with a subordinated debt facility for 60-year maturity. So, they've really taken a very proactive position and I think it just proves how they're both a good manager of assets and a very good manager of capital.
Hall: Okay. So, that's Scentre Group. And the final name on our list today, Grant, also 3-Stars or fairly valued in Morningstar's eyes, is Australia's largest housing developer and that's Stockland, of course.
Berry: Yeah. Well, Stockland is a very interesting one. Again, it's a group that's been around for many years. We're talking 60 years. And as you mentioned before, they are the largest landowner in the country of around 80,000 lots. And they also own a portfolio of like GPT diversified of retail, a bit of commercial office and they're building up their logistics profile there as well.
Coming to COVID, I guess all of us initially we had concerns with residential because, of course, you know, if we're going into recession, that's not good for the housing market clearly. But importantly, the whole sales system was disrupted. You couldn't even conduct people through your sales office. As you know, auctions, you couldn't have auctions and things like things of that nature. So, it was a very difficult time. But having said that, they took a very proactive position in terms of how they managed their sales operations. And then, we also saw very strong responses by both the RBA in terms of interest rate settings and then we also saw it federally in terms of stimulus, primarily the home builder.
So, what we've actually seen coming out of Stockland is we've actually seen the strongest sales since 2017. They think coming out of COVID that there's going to be a bit more appreciation for space and community. So, people will work a little bit more from home. It's not going to be the new normal, And they will certainly appreciate space, the ability to have an office and they may sacrifice a little bit of that commute. And certainly, the communities I know where I live, the community and the suburb is certainly revitalized through this COVID period. So, they've found themselves as a beneficiary, and I think a lot of this will be longer-lasting. And the same with their retail portfolio. Their retail portfolio is very much about town centers and the community and I see that benefiting as well. So, I see them well set up for the next few years and we're getting a good yield out of them as well.