REIT Analysis

SSUD71-119

SGP

LEP A-REIT Analysis

Mario Shllaku 13409878

SSUD71-119

LEP VS. SGP

table of contents

2

Introduction

03

Portfolio Characteristics

26

Why LEP vs. SGP

05

Geographic Distribution

28

LEP

06

Motivation & Investment Strategy

30

Trust and Structure Composition

07

Historic Performance of SGP

31

Portfolio Characteristics

10

Financial Performance

33

Geographic Distribution

12

Profitability

35

Motivation & Investment Strategy

14

Market Commentry

37

Historic Performance of LEP

16

Key Metrics Comparison

45

Financial Performance

20

Conclusion

48

Profitability

21

SGP

22

Trust Structure & Composition

24

SSUD71-119

A-REIT ANALYSIS

abstract report in a nut-shell Investigating and evaluating two A-REITS financial performance. Reviewing their portfolio, financial data and comparing financial ratios to determine the best option.

The purpose of this report is to investigate two ASX listed A-

better investment thus, determining if the non-traditional or

REIT funds. Particularly this report was interested in comparing

traditional sector show the best performance.

the performance of non-traditional sector with a traditional sector in A-REIT. Researchers (Newell & Peng 2010, Tan 210,

Ratios used to determine financial performance for each of

Newell 2011) demonstrated that non-traditional sector is per-

the trusts were compared in relation to each-other. The results

forming better in Australian market. However, market analyst

demonstrate that in short-term it is better investing in LEP.

( Vandyck 2016) and several financial websites (Investing.com,

However, in long-term, considering several uncertainties and

Credit Suisse Australia, bloomberg) stress the fact that the risky

risks related with international factor, SGP is considered to be a

times ahead are calling for investments in traditional markets.

better option.

By selecting ALE property group (LEP) and Stockland (SGP), the report provides insights on performance of this two different trust in a five-year period, starting in 2011 until 2016. Their performance was assessed against ASX and A-REIT 200 (and 300).

Investigating property characteristics provided more in-depth analysis on how LEP and SGP manage their portfolio.

This exploratory study analyses data from balance sheets

“The market is the sum of all wisdom and all stupidity of everyone who trades it. � (Dennis Gartman)

to determine the financial performance of selected Trusts.

Different ratios were used to establish which of the trust is a

3

SSUD71-119

LEP VS. SGP

introduction the report

Following Global Financial Crisis (GFC) are the uncer-

The exploratory study is focused in the performance

tainties in financial markets. Recent developments

of ALE Property Group (LEP) which represents the non-

in international arena have further enhanced uncer-

traditional sector in A-REITs and Stockland (SGP) as a

tainties in Australian stock markets. During the last

main actor in the traditional sector. The report utilises

five years, Australian A-REITs in general have demon-

data from Morning star, and respective annual reports

strated to perform well. However, 2017 is expected

to: outline the composition of trust, property portfolio,

to have significant developments which will impact

historic performance and financial performance. Ad-

the confidence that A-REITs have developed so far. In

ditionally, the data was interpreted to determine risk

this circumstances, it is crucial to take advantage of

factors associated with selected trusts.

investment opportunities as they arise. Which sector of A-REIT’s offer better and safer opportunities?

The report acknowledges the difficulties of compering two different A-REITs. Many ratios are not relevant

The purpose of this report is to investigate whether

to compare as the structure and size of LEP and SGP

non-traditional sector of A-REIT’s has performed better

are very different. However, efforts were done to

than the traditional one and if it will continue to do so

understand which provides a better decision, hence

in the future. Understanding their past performance is

understanding which of sectors (traditional and non-

critical to make an informed decision in investment.

traditional) represents a better investment. The result represents a picture of real estate market in Australia.

Structure & Portfolio

Financial Comparison & performance market commentary

Initialy the report explores the structure

Financial performance of LEP and SGP

Market commentary provides a general

and portfolio composition.

was done through Balance Sheet , Profit

otulook of what is expected to occur

Margin, HPR and many other ratios.

during 2017 and how that will impact A-REIT

4

SSUD71-119

A-REIT ANALYSIS

NON-TRADITIONAL SECTOR OF A-REIT IS PERFORMING BETTER THAN THE TRADITIONAL ONE. Newell & Peng (2008)

the reasons to choose LEP & SGP

PORTFOLIO Provided insight on portfolio management and characteristics.

The main reason attributed to

with residential property and ALE

selection of two different AREIT’s is

Property has a portfolio of 86 pubs

to comprehend how a traditional1

across Australia.

listed entity (SGP) and a non-tradi-

FINANCIAL

tional2 listed entity (LEP) perform

Following the report will concen-

against other investments such

trate in reviewing the two selected

as government bonds and stock

A-REITs and comment on them

market shares.

based on their;

Explored and investigated finan-

a. Trust structure and com-

cial data to determine the best

Additionally, they provide interest

position

performing trust

to compare how a traditional and

b. Characteristic and type of

a non-traditional reacted during

real estate assets held

crisis and the future perspective

c. Geographic distribution

of these listed entities. The se-

d. Number of assets held

lected AREIT’s are in two different

and value of fund

property sectors. Stockland deals

e. Diversification

COMPARISON Compared ratios and trust.

Referring to Newell & Peng (2008) a ‘traditional sector’ in Australia is encompasses the following property types:

1

residential, retail, office and industrial.

Otherwise known as emerging sector, include properties such as: hospitals, retirement village, nursing home,

2

childcare, pubs, parks, cinemas ect. (Newell & Peng 2008).

5

SSUD71-119

LEP VS. SGP

LEP

Ale Property introduction Group ALE property group has the largest portfolio of Pubs in Australia. ALE has built a portfolio of 83 pubs from 2003 until nowadays, running across five mainland Australian states.

Highlights 1. 13 Years as listed entity.

2. Largest Group owning pubs and hotels in Australia.

3. Most properties located in VIC and QLD. 4. Exceptional WALE. 5. Investing only in Australia.

6

SSUD71-119

A-REIT ANALYSIS

structure & composition ALE Property Group (“ALE”) comprises

ALE is the main trust acquiring stra-

Group. The main sectors that ALE invests

Australian Leisure and Entertainment

tegic properties. that are then leased

are pubs, which is seen as providing a

Property Trust (“Trust”) and its controlled

back to its main tenants being ALH and

long term secure cash flow.

entities including; ALE Direct Property

Taverner. ALH is substantially owned

Trust (“Sub Trust”), ALE Finance Com-

by Woolworths Limited, which is one of

The properties owned by ALE are leased

pany Pty Limited (“Finance Company”)

Australian leading retailer which include

to Australian Leisure and Hospitality

and Australian Leisure and Entertain-

operations for Woolworths liquor, Den

Group (ALH) for 13 years term. Further

ment Property Management Limited

Murphy and BWS.

the ALH group is owned by Woolworths

(“Company”) as the responsible entity of the Trust.

Limited (75%) and Bruce Mathieson In a nut shell, the properties that are

Group (BMG) (25 %) (ALE Annual Report

considered strategic for ALH and Tavern-

2016).

er, are acquired through ALE Property

Stapled Securities Holders Shares 100%

ALE Property Management

Units 100%

Nivus

ALE Property Trust Units 100%

ALE Property Trust Shares 100%

ALE Finance

7

SSUD71-119

LEP VS. SGP

characteristics of property portfolio ALE’s 2016 annual report revealed that

Currently the ten years ALE’s capital-

A-REIT’s. The findings indicate that ALE

the Fair Value of the investment prop-

ization rate and bond rates are at its

prefer not to diversify their portfolio.

erties determined by examining proper-

highest 3.5% (ALE Annual Report 2016).

ties location, age and tenant quality is $

Additionally, a major contribution to the

ALE is constantly seeking to acquire fur-

900.5m. Figure 1 reveals valuations done

steady increase in Fair Value arrives from

ther properties that represent a strategic

from December 2014 till the most recent

the sole WALE of 13.4 Years and to the

location for its tenants. This is due to

one which is June 2016.

unique lease terms which offer further

the unique and favorable lease arrange-

security of rent income and opportunity

ments of ALE. Supported by a WALE of

for the rent to grow.

13.4 years as well as near term market

3

The increase in value over 8% from Dec14 to Jun-15 is attributed to acquiring

rent review for 79 properties in 2018.

of 5 properties by ALE. Other than that

ALE has invested in 86 pubs across Aus-

the data indicates that the Fair Value of

tralia. Portfolio of ALE is sector-specific

Investigating the selected fund requires

properties as per the indicated dates has

focusing in investments on non-tradi-

qualitative and quantitative analysis

had a steady increase of an average of

tional sector. This strategy shows to be

(Rowland, 2010). The qualitative method,

5.5 % for every half year. This increase

inline with Australian REIT’s which in

for which we are interested under this

is related mainly to the decrease of

general are subjugated by sector specific

section of the report, requires examina-

Australian long-term bond rates and to

investments (Tan 2004). However, ALE

tion of properties invested by the trust.

the recent reduction of ALE’s weighted

represents a unique investment strategy

Thus, out of 86 below are presented only

average capitalization rate from 5.99%

as it is driven by sector specific invest-

premium grade properties.

to 5.53%.

ments but in non-traditional sector. This makes ALE unique compared to other

1200 1000 VALUE

800 821.68

837.89

900.47

953.86

990.48

600 400 200

Figure 1: LEP property valuation

0

VALUATION DATE Fair Value (in million $)

Fair Value as referred by Australian Accounting Standard Board (AASB) which is an estimation of the price at which a transaction to sell the asset or

3

8

transfer the liability would take place between market participants at the measurement date under current market conditions (AASB 2011 p.8).

SSUD71-119

A-REIT ANALYSIS

LEP portfolio characteristics

PROPERTY ASSET

Boundary Hotel, Melbourne, VIC

Albany Creek Tavern, Brisbane, QLD

Aberfoyle Hub Tavern, Adelaide, SA

Balmoral Hotel, Perth, WA

Retail Liquor

Retail Liquor

Retail Liquor

Retail Liquor

Retail Liquor

KEY TENANTS

1. BWS

1. BWS

2. DM

1. BWS

1. N

VALUE (in million AUD)

$12.23

$22.90

$15.90

$6.57

$6.50

WALE (in years)

15.0

9.3

8.1

8.4

9.6

CAP RATE

5.75%

6.38%

5.36%

5.97%

7.29%

YIELD

6.10%

7.50%

6.49%

6.38%

8.50%

ADDRESS

ASSET TYPE

Brown Jug Hotel, Sydney, NSW

9

SSUD71-119

LEP VS. SGP

LEP

GEOGRAPHIC DISTRIBUTION ALE property group has the largest portfolio of Pubs in Australia. From 2003, when it was first created, till nowadays ALE has accumulated a portfolio of 83 pubs running across five mainland Australian States.

4 WESTERN AUSTRALIA ALE’s four historic Western Australian hotels are located within Perth and Freemantle CBDs’ popular entertainment and shopping districts with a thriving cafe and pub culture

SOUTH AUSTRALIA ALE’s seven South Australian hotels are located in the growth areas of Adelaide’s northern suburbs and the Adelaide Hills.

10

SSUD71-119

A-REIT ANALYSIS

32

7

QUEENSLAND The Queensland portfolio of 32 pub properties is well located on major arterial roads throughout Brisbane’s major metropolitan area and in the growth centres of Gold Coast, Sunshine Coast and North Queensland. Ten Dan Murphy stores have been constructed on ALE’s Queensland properties over the last five years.

10 NEW SOUTH WALES

33 VICTORIA ALE’s 33 Victorian hotels are strategically located within major population catchment areas and growth corridors.

These large land banks are well positioned for our tenant ALH to take advantage of future growth potential over the term of the lease.

ALE’s 10 New South Wales pub properties are well located within areas that have a population density of over 1,300 people per square kilometre on Sydney’s northern beaches and in the western suburbs.

Three Dan Murphy stores have been constructed on ALE’s properties in New South Wales.

11

SSUD71-119

LEP VS. SGP

portfolio distribution

Main geographical areas where LEP concentrate their investment are VIC (38%) and QLD (37%). However, only VIC is contributing more towards the total value of portfolio (48% weight).

Chart Title

WHERE IS LEP INVESTING

comparison demonstrates an interest-

Analysis has revealed that all ALE’s port-

SA 8%

folio is comprised of domestic proper-

WA 5%

ing fact that weight of geographical

NSW 12%

distribution is not similar with the value

ties. Mainly, they are concentrated in 5

contribution to the overall portfolio.

Australian states: 33 properties in VIC, 32 properties in QLD, 10 properties in NSW,

QLD 37%

41%

VIC 38%

Referring to SA and WA, although they together make up 13% of overall prop-

7 properties in SA and 4 properties in

erty portfolio, their value contributes

WA. This suggests that ALE prefer not to

only 7% to the total portfolio value.

diversify through inclusion of interna-

Chart Title

Figure 2: Geographical Spread of LEP

tional properties in their investment portfolio. As a result, they are focused

SA WA 4% 3%

in Australia where they have gained

The results from comparing Figure 2 and

confidence on the market behavior

3 from below depict that the major con-

and prefer not to take risks in unknown

tributors to the Fair Value of ALE’s prop-

markets.

erties are as suggested by geographical spread, VIC (48%) and QLD (31%). These

12

NSW 14%

QLD 31%

VIC 48%

Figure 3: Value of Properties by State

SSUD71-119

A-REIT ANALYSIS

MOTIVATION & INVESTMENT STRATEGY Further, the report has highlighted the potential motivating and risk factors that influence the investment decision of ALE. This was prepared by analysing the composition of Trust structure, portfolio composition, asset Fair Value and the geographical distribution of properties.

MOTIVATING FACTORS FOR LEP INVESTING IN PUBS

VERY IMPORTANT

The trust structure and shareholders of

• Composition of trust structure with Woolworths owning 75% and agree-

LEP are suggesting that the trust has a

ment with ALH influencing in investment decisions;

great understanding of this particular

• Very good performance of non-traditional property sector in AREIT;

non-traditional sector. Unique lease

• Expertise in this sector.

terms and agreements as well as the

• Lease terms

competitive WALE of 13.4 years, are a demonstration of LEP’s knowledge of this specific sector in A-REIT’s. Addi-

IMPORTANT

tionally, the competition in pub sector in A-REIT’s is inexistent. The strong performance of non-traditional sector in Australia is a further influence in LEP

• Stability of returns;

investment strategy.

• Prefer a passive investment approach; • Geographic Location/competition;

Having specific portfolio, in one hand

• Competitive market Capitalisation Rate;

rises the risk associated with special-

• High Yields.

ized asset types but on the other hand require less management complications, thus focusing the trust in one core business.

The table below provides an overview of

LESS IMPORTANT

the main factors influencing the invest-

• Age of building;

ment strategy of ALE:

• Green ratings;

13 Table 1: Motivating Factors for ALE Investment Strategy

SSUD71-119

LEP VS. SGP

investment strategy

continue

PORTFOLIO MANAGEMENT

AS EXPLORED FROM THE ANNUAL REPORTS, THE MAIN AREAS WHERE MANAGEMENT OF

Compelled by strong capital inflow

ALE IS ACTIVE ARE AS FOLLOWS:

and the current market conditions, ALE intends to increase the size of their portfolio. The current economic performance of ALE is favors expanding its portfolio.

However, the BREXIT, followed by USA

RETURNS

• Improving Returns compared to previous years;

elections which caused bonds to increase thus affecting the cap rates of AREIT’s (Harley & Lenaghan 2016 par. 14), have created not so favorable economic conditions in the last quarter of 2016.

YIELDS & CAP RATES

• Attractive Yields compared to those of previous years; • Attractive Capitalization rates from that of previous year.

Managing the current assets is a crucial part of ALE’s strategy. They have to insure that the Fair Value of the properties has to increase from the latest valuation done. Part of the management include

PROPERTY VALUE

• Property value for ALE is done through CAP Rates and not through cash flow.

• Thus, management is focused in lowering CAP Rates for properties owned.

adjusting rents to take advantage of the property cycle. Hence, LEP is active in managing its property portfolio. Data from the annual report demonstrates that the rebalance occurs annually.

The main areas focused to improve the performance of ALEs’ portfolio included: rental revenue and earnings per unit, the distributed profit and increase in rents based on market conditions. Also from the annual reports, was noted that the preferred holding period was more than 10 years. This is understandable since the lease terms of ALE are 14 years minimum.

14

CAPITAL MANAGEMENT • Focused in aspects of managing refinancing risks;

• Finding best properties to acquire to add value to their portfolio.

Table 2: LEP Management areas

SSUD71-119

A-REIT ANALYSIS

ing economic growth (NT) or population growth.

OTHER QUALITATIVE DATA AFFECTING INVESTMENT STRATEGY OF ALE.

Tourism is the third largest Australian export (Reserve Bank of Australia 2015).

Additionally, New Zealand can be con-

However, data has showed that domes-

sidered as a new frontier of investment

tic tourism expenditure is higher than

expanding thus the portfolio. Risks re-

As mentioned, the majority of the

international tourism (Reserve Bank of

lated with this action are high. However,

properties is located in VIC followed by

Australia 2015). Thus, it is obvious that

this might be seen as a reason why ALE

QLD. Somehow, this is not related to the

investing in Pubs in QLD and VIC can be

has recently appointed a new non-exec-

economic performance of the states.

seen as an opportunistic decision.

utive director which has over 30 years of

In the 2016 State of the States report

experience in risk management.

by CommSec, NSW is the top perform-

More supportive data, that explains the

ing economy in Australia. Only 11.6%

ALE investment strategy, arrives from

Understanding ALE’s strategy in locating

of ALE’s total portfolio of properties is

domestic tourism data. Referring to a

a major part of their properties in QLD

located in NSW. While NSW remains top

survey done by Roy Morgan Holiday

in comparison to NSW, requires further

ranking on retail and population growth

Tracking Survey (2014) Gold Coast,

investigation into the structure of the

and second on economic growth (Com-

Sunshine Coast and Brisbane are among

trust and the way it operates. Given the

mSec, 2016), it is unclear why ALE’s port-

the top favorite destinations in domestic

strong relation between ALE, ALH (larg-

tourism. This supports why ALE has con-

est pub operator) and Woolworths (larg-

centrated a large part of their property

est liquor retailer in Australia) it is worth

in QLD. However, it is hard to deduct

investigation on the alcohol consump-

that future investment will be located

tion in Australia by state. Mainly because

in the major areas again. Competition

the revenue from operating pubs is

within the pubs owned and the luck of

strongly related with the level of alcohol

quality locations are some of the factors

consumption.

that might prevent ALE to invest further in QLD and VIC. Future investment can

Data have demonstrated that QLD

be concentrated in territories experienc-

holds the first place for alcohol intake in Australia followed by VIC (Australian

Figure 4: Australian Tourism Expenditure (Source: ABS 2016)

Institute of Health and Welfare 2013). We can further deduct that QLD by being

folio is concentrated more in VIC and QLD. It is understandable for VIC to be a

QLD, 28.2%

NSW, 23.7%

the 5th economy is much more volatile

strategic location as it is ranking second

towards unemployment which is related

in population growth, retail trade and

closely with alcohol consumption.

Therefore, there is a strong motivation

many other activities but the strategy to base major part of the investment in

VIC, 25.0%

QLD is yet to be explored.

According to CommSec economist Mr

Figure 6: Proportion of drinkers in Australia (Adopted from: AIHW 2013)

Savanth Sebastian, tourism is the big driver for QLD economy (Hyam 2016).

If so, it is comprehensible why ALE has based a major part of its pub investment in QLD. However, statistics have demonstrated that QLD ranks third as a preferred destination for international tourists with NSW first in the list and VIC second (Australian Bureau of Statistics 2016).

Figure 5: Domestic vs International Tourism patterns (Source: ABS)

15

SSUD71-119

LEP VS. SGP

historic performance

LEP

Figure 7: Comparison between LEP, A-REIT 300 and ASX 300

Mean: -0.08% Stdv: 1.154%

LEP VS A-REIT & ASX 300

LEP VS A-REIT & ASX 200

The graphic above (figure 7) measures

Similar results as the first graph are

the performance of ALE security price

confirmed in comparing ALE with A-REIT

and distributions over the last 12 years

200 and ASX200 (figure 8). For a period

compared to A-REIT 300 and ASX 300.

of five financial years, from 2011 till

In general, for ALE, the security price,

2016, ALE have demonstrated to outper-

distribution and returns have increased

form the above mentioned markets.

at an average of 21.9% p.a. over the last in most of the times LEP has

12 years. This suggests that for one dol-

In most times ALE has provided a return

provided a return to its investors

lar invested the turnout is 11.33 dollars.

to its investors between -2.388% and

between -2.388% and 2.228%.

With the red line is the all ordinaries

2.228%, according to mean and stan-

index which demonstrate that in a gen-

dard deviation.

eral equity market they have delivered 8.2% p.a. Whereas general property

Another important message from figure

trusts have only delivered 5.4% p.a. This

7 is looking at the relation between ASX

indicates that ALE has outperformed not

200, A-REIT 200 and LEP. As noted with

only the property trusts but also even

dotted rectangle, apart from end of 2013

the general equity market consistently

beginning of 2014 period where ASX

over the 12-year period.

almost outperformed A-REIT, there is a strong correlation between the two. This correlation is not relevant for LEP stock.

LEP can continue growing even If ASX

16

SSUD71-119

A-REIT ANALYSIS

LEP 250%

222%

200%

175% 150%

114% 100%

50%

0% 1-Jul-11

1-Jul-12

1-Jul-13 A-REIT 200

1-Jul-14 ASX 200

1-Jul-15

LEP

Figure 8: Comparison between LEP, A-REIT 200 and ASX 200

and A-REIT drop.

portfolio cap rates have moved com-

In terms of historic performance, the

pared to the long 10 Year Australian

portfolio cap rates of ALE are measured

government bond rates. It is clear that

against Australian 10-year Bond Rates.

the government Bond rates have fallen

The purpose of this analysis is to under-

significantly in Y12, more than 3%, while

stand the correlation between bond

the ALE cap rate fall only 0.8%. Currently

rates and capitalization rates of ALE. The

in Australia the long term real Bond rates

contemporaneous correlation between

have fallen further. Meantime, ALE cap

A-REIT’s and bond is described as being

rates now exceed the long term bond

negative (Rowland p. 415). Therefore, an

rates by more than 5%.

LEP VS AREIT 300 VS AREIT 200:

increase in bond rates, as we have seen

222%

recently in the markets, would negative-

The message of this graph is that there is

ly impact the capitalization rate of ALE.

significant buffer for cap rates to hold in a situation where interest rates grow.

175%

AUS 10-Y BOND VS LEP PORTFOLIO CAP RATES. Chart in figure 9 demonstrates how

8.2%

21.9%

A-REIT 300

LEP

Figure 9: ALE Cap. rates VS Australian 10 Year Bond rates (Source ALE Annual Report 2016)

A-REIT 200

LEP

17

SSUD71-119

LEP VS. SGP

FINANCIAL PERFORMANCE DISTRIBUTION PER UNIT VS MARKET PRICE: Although market price has increased, distribution per unit remains at the same lavels as five years ago

$0.17 $0.16 $0.16 $0.2

$2.92

$4.55 $3.69

$2.67

Market Price per Unit/ Distribution

$0.16 $2.14 $1.9

2011

18

2012

2013

$0.20

2014

2015

2016

The financial performance of the selected trust is based on quantitative data. The analysis was concentrated in constructing the financial performance of the trust through their Balance Sheet, analyzing key indicators such as NTA ratio, premium/discount to NTA and other ratios. Finally, the report trusted on Book-To-Market Ratio to determine the value of ALE. BALANCE SHEET The evaluation of ALEs’ balance sheet for a period of 5 years demonstrate that the Net Tangible Assets (NTA) have been growing to an average of 7% p.a. The steady increase of ALE’s NTA is strongly related with the increased valuation of their portfolio. Market capitalization approves the average increase of NTA, thus demonstrating an increase in portfolio value of 7% on average for 5 years. Additionally, market capitalization has increased nearly three times from 2011 to 2016. Again, this is dedicated to increase in value of properties.

SSUD71-119

BALANCE SHEET $Millions as at 30th June Units on Issue

A-REIT ANALYSIS

Y EAR 2011

2012

2013

2014

2015

2016

157.99

159.86

194.24

195.7

195.7

195.77

Cash

$110.18

$44.43

$54.65

$149.96

$44.81

$37.92

Receivables

$11.23

$2.28

$1.38

$2.15

$0.32

$0.28

$0.40

$0.23

$0.25

$0.25

$0.22

Current Assets

Other $1.70 Total Current $123.11 Assets Non-Current Assets Investment $758.28 Properties Other Assets $12.65

$47.11

$56.26

$152.36

$45.38

$38.42

$771.53

$786.00

$821.68

$900.47

$990.48

$29.12

$22.80

$4.48

$0.33

$0.32

Total NCA

$770.93

$800.65

$808.80

$826.16

$900.80

$990.80

Total Assets

$894.04

$847.76

$865.06

$978.52

$946.18

$1,029.22

Current Liabilities Deferred Tax Liability Debt

$94.62

$98.11

$20.23

$127.18

$24.39

$27.40

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$399.25

$405.19

$403.01

$426.47

$432.10

$441.61

Other

$10.35

$23.44

$18.81

$0.00

$1.14

$26.35

Total Liabilities

$504.22

$526.74

$442.05

$553.65

$457.63

$495.36

Net Tangible Assets Distribution Per Unit (cent) Market Price (30th June) per unit Market Capitalisation

$389.82

$321.02

$423.01

$424.87

$488.55

$533.86

0.1975

0.16

0.16

0.1645

0.1685

0.2

$1.900

$2.140

$2.670

$2.920

$3.690

$4.550

$300.18

$342.10

$518.62

$571.44

$722.13

$890.75

Table 3: ALE Balance Sheet

19

Other

$1.70

Total Current Assets

$0.40

$123.11

$0.23 $47.11

$0.25 $56.26

$0.25

$152.36

$0.22 $45.38

$38.42

Non-Current Assets Investment Properties SSUD71-119

$758.28

$771.53

$786.00

$821.68

$900.47

Other Assets

$12.65

$29.12

$22.80

$4.48

$0.33

$990.48 LEP VS. SGP $0.32

Total NCA

$770.93

$800.65

$808.80

$826.16

$900.80

$990.80

Total Assets

$894.04

$847.76

$865.06

$978.52

$946.18

$1,029.22

Current Liabilities

$94.62

$98.11

$20.23

$127.18

$24.39

$27.40

Deferred Tax Liability

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$399.25

$405.19

$403.01

$426.47

$432.10

$441.61

Debt Other Total Liabilities

key indicators $10.35

$23.44

$18.81

$0.00

$1.14

$26.35

$504.22

$526.74

$442.05

$553.65

$457.63

$495.36

of financial performance Net Tangible Assets

Distribution Per Unit (cent)

$389.82

$

$321.02

0.20 $

$423.01

0.16 $

$424.87

0.16 $

$488.55

0.16 $

$533.86

0.17 $

0.20

Market Price (30th June) per unit

$1.900

$2.140

$2.670

$2.920

$3.690

$4.550

Market Capitalisation

$300.18

$342.10

$518.62

$571.44

$722.13

$890.75

Further analysis includes determining NTA per share, Premium (discount) to NTA, Debt-to-Property Assets, Liabilities to total assets and historic yields. As noted from 7.48%price has 5.99% 5.63% 4.40% the table below, in10.39% 2011 the share a substantial deviation4.57% from the NTA.

ANALYSIS

2011

2012

2013

2014

2015

2016

NTA per Share

$2.47

$2.01

$2.18

$2.17

$2.50

$2.73

-22.99%

6.57%

22.60%

34.50%

47.81%

66.85%

44.66%

47.80%

46.59%

43.58%

45.67%

42.91%

56.40%

62.13%

51.10%

56.58%

48.37%

48.13%

10.39%

7.48%

5.99%

5.63%

4.57%

4.40%

Premium (discount) to NTA Debt to Property Assets Liabilities to Total Assets Divident Yield

Table 4: ALE Financial Performance Indicators Book-To-Market Ratio

2011

2012

2013

2014

2015

2016

1.30

0.94

0.82

0.74

0.68

0.60

The share prices were trading at 22.99 % discount to NTA (Table 4). The periodINCOME of 2011-2012 presented a high opSTATEMENT portunity for investors who profited to $Millions as at 30th buy shares and sell them 2011 during 2013 2012 June tillNet2016.

The possible$50.24 reasons related Rental Income $51.88 with ALE trading at a discount rate at Loan Interest $29.67 $30.36 2011 can Profit be related with Net Annual $20.57the post GFC $21.52 effects which is a seeming inability to pay dividends.

Three Ratios

20

Some factors contributing to ALE trading at a premium to its asset value are related with: YEAR

Increased experience of the company; performance (valuations); 2013Increased portfolio 2014 2015 2016 Strong WALE; $53.10 $54.19 $55.21 $56.17 The ability$27.24 to increase capital invest$26.62 $22.74 for future $21.05 ments, particularly with the 2018 refi$26.48 $26.95 related$32.47 $35.12 nancing.

YEAR

2011

2012

2013

2014

2015

2016

Return on Assets

3.65%

4.92%

4.86%

3.77%

3.99%

1.73%

Return on Equity

1.83%

5.14%

6.86%

4.83%

4.64%

0.31%

1.22

1.50

1.77

1.75

1.90

1.13

Interest Cover Ratio

$430.19

$557.54

SSUD71-119

A-REIT ANALYSIS

YEAR

BALANCE SHEET

Book - To - Market $Millions as at 30th June Units on Issue

2011

2012

2013

2014

2015

2016

157.99

159.86

194.24

195.7

195.7

195.77

Current Assets Cash

$110.18

$44.43

$54.65

$149.96

$44.81

$37.92

Receivables

$11.23

$2.28

$1.38

$2.15

$0.32

$0.28

Other

$1.70

$0.40

$0.23

$0.25

$0.25

Ratio Total Current Assets

$123.11

$47.11

$56.26

$152.36

$0.22 $45.38

$38.42

Non-Current Assets Investment Properties

$758.28

$771.53

$786.00

$821.68

$900.47

$990.48

Other Assets

$12.65

$29.12

$22.80

$4.48

$0.33

$0.32

Further, Book-To-Market ratio was used to determine the value of ALE. As noted below, the ratio confirms the data from premium/discount NTA from the above table. During the year 2011, ALE’s shares were undervalued and since then they have steady continued to overvalue.

Total NCA

$770.93

$800.65

$808.80

$826.16

$900.80

$990.80

Total Assets

$894.04

$847.76

$865.06

$978.52

$946.18

$1,029.22

Current Liabilities

$94.62

$98.11

$20.23

$127.18

$24.39

Deferred Tax Liability

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$399.25

$405.19

$403.01

$426.47

$432.10

$441.61

Debt

$27.40

Other

$10.35

$23.44

$18.81

$0.00

$1.14

$26.35

Total Liabilities

$504.22

$526.74

$442.05

$553.65

$457.63

$495.36

Net Tangible Assets Distribution Per Unit (cent)

$389.82 $

$321.02

0.20 $

$423.01

0.16 $

$424.87

0.16 $

$488.55

0.16 $

$533.86

0.17 $

$430.19

0.20

The current ratio of 0.75 doesn’t necessary suggest that it will continue to be overvalued in the coming years. The outlook of this ratio during the coming years is strongly related with the 2018 refinancing strategy of ALE. As a 7.48% 5.63% 4.40% consequence,10.39% the debt of ALE5.99% will increase in4.57% the balance sheet affecting thus the NTA and eventually causing the 2011 2012 1. A strong 2013 2014 2015 2016 ratio to get $2.47 closer to resistance for the$2.73 ratio $2.01 $2.18 $2.17 $2.50 to go above 1 will come from the revaluation of properties in June 2018. It is expected that the value in 2018 will have a significant increase from the previous year as 76 properties will renew their lease for another 20 years.

Market Price (30th June) per unit

$1.900

$2.140

$2.670

$2.920

$3.690

$4.550

Market Capitalisation

$300.18

$342.10

$518.62

$571.44

$722.13

$890.75

-22.99%

6.57%

22.60%

34.50%

47.81%

66.85%

44.66%

47.80%

46.59%

43.58%

45.67%

42.91%

56.40%

62.13%

51.10%

56.58%

48.37%

48.13%

10.39%

7.48%

5.99%

5.63%

4.57%

4.40%

2011

2012

2013

2014

2015

2016

1.30

0.94

0.82

0.74

0.68

0.60

$2,581.13 16.67%

$557.54

$3,345.23 16.67%

ANALYSIS

NTA per Share

Premium (discount) to NTA Debt to Property Assets Liabilities to Total Assets Divident Yield

Book-To-Market Ratio

Table 5: ALE Book-To-Market Ratio INCOME STATEMENT $Millions as at 30th June Net Rental Income

YEAR

2011

2012

2013

2014

2015

2016

$50.24

$51.88

$53.10

$54.19

$55.21

$56.17

Book-To-Market

Loan Interest

$29.67

$30.36

$26.62

$27.24

$22.74

$21.05

Net Annual Profit

$20.57

$21.52

$26.48

$26.95

$32.47

$35.12

2011

2012

2013

2014

2015

2016

Return on Assets

3.65%

4.92%

4.86%

3.77%

3.99%

1.73%

Return 1.00on Equity

1.83%

5.14%

6.86%

4.83%

4.64%

0.31%

1.22

1.50

1.77

1.75

1.90

1.13

1.40

Three Ratios

1.20

Interest Cover Ratio

YEAR

0.80 0.60 0.40 0.20 0.00 2010

2011

2012

2013

2014

2015

2016

2017

21

Investment Properties

$758.28

$771.53

$786.00

$821.68

$900.47

$990.48

Other Assets

$12.65

$29.12

$22.80

$4.48

$0.33

$0.32

Total NCA

$770.93

$800.65

$808.80

$826.16

$900.80

Total Assets

$894.04

$847.76

$865.06

$978.52

$946.18

SSUD71-119

$990.80 $1,029.22

LEP VS. SGP

Current Liabilities

$94.62

$98.11

$20.23

$127.18

$24.39

$27.40

Deferred Tax Liability

$0.00

$0.00

$0.00

$0.00

$0.00

$0.00

$399.25

$405.19

$403.01

$426.47

$432.10

$441.61

Debt Other

$10.35

$23.44

$18.81

$0.00

$1.14

$26.35

Total Liabilities

$504.22

$526.74

$442.05

$553.65

$457.63

$495.36

PROFITABILITY Net Tangible Assets

Distribution Per Unit (cent) Market Price (30th

$389.82

$

$321.02

0.20 $

$1.900

$423.01

0.16 $

$2.140

$424.87

0.16 $ $2.670

$488.55

0.16 $ $2.920

$533.86

0.17 $ $3.690

0.20 $4.550

June) per unit To assist investment decision making, the report has undertaken further evaluaMarket Capitalisation $300.18 $342.10 $571.44 $722.13 $890.75 tion and interpretation of financial data $518.62 of ALE. Three are the key metrics examined under this section; the Income Statement along with another table which includes return on Assets, Equity and Interest Cover Ratio and the return on capital employed ratio.

10.39% 7.48% 5.99% 5.63% 4.57% 4.40%

INCOME STATEMENT ANALYSIS

2011

The table below represents an NTA per Share $2.47 overview of the Net Income for the Premium (discount) to -22.99% NTAyears under investigation. As five to Property itDebt is noted from the table44.66% 5, during Assets the years to2011 Liabilities Totaltill 2016, ALE has 56.40% Assets experienced a growth of an averDivident Yieldp.a. in the Net 10.39% age of 17% Annual Profit (NAP). The increase in NAP obviously is supported by the yearly Book-To-Market Ratio

INCOME STATEMENT $Millions as at 30th June

2015

2016

$2.50

$2.73

47.81%

66.85%

45.67%

42.91%

48.37%

48.13%

7.48%

5.99%

5.63%

4.57%

4.40%

2011

2012

2013

2014

2015

2016

1.30

0.94

0.82

0.74

0.68

0.60

YEAR 2011

2012

2013

2014

2015

2016

Net Rental Income

$50.24

$51.88

$53.10

$54.19

$55.21

$56.17

Loan Interest

$29.67

$30.36

$26.62

$27.24

$22.74

$21.05

Net Annual Profit

$20.57

$21.52

$26.48

$26.95

$32.47

$35.12

Table Three 6:ALERatios Income Statement

YEAR

2011

2012

2013

2014

2015

2016

Return on Assets

3.65%

4.92%

4.86%

3.77%

3.99%

1.73%

Return on Equity

1.83%

5.14%

6.86%

4.83%

4.64%

0.31%

1.22

1.50

1.77

1.75

1.90

1.13

Interest Cover Ratio

22

rent review as well as the matur2012 2013 2014 ing of borrowings. The significant $2.01 $2.18 $2.17 increase in NAP from year 2014 to 6.57% 22.60% 2015 its dedicated to the effects 34.50% of 2014 of debt (ALE 2015).

47.80%refinancing46.59% 43.58% Confirming thus the strong relation 62.13% 51.10% 56.58% between borrowings and profit.

$430.19

$557.54

SSUD71-119

A-REIT ANALYSIS

ABILITY TO GENERATE EARNINGS Following the report examines how effective is ALE using their resources to generate income. The ratios under investigation, as per reference to Easton, P. (2001), are Return on Assets, Return on Equity and Interest Cover ratio

Profit Margins

YEAR 2011

2012

2013

2014

2015

2016

Return on Assets

3.65%

4.92%

4.86%

3.77%

3.99%

1.73%

Return on Equity

1.83%

5.14%

6.86%

4.83%

4.64%

0.31%

1.20

1.39

2.21

1.95

1.90

1.13 1.07

Interest Cover Ratio

Table 7: ALE profitability margins

POSITIVE ROA

ROE

INTEREST COVER RATIO

Indicates a generally an upward

Expressed in percentage repre-

Has improved from 2011 till

trend of ALE. As mentioned,

sents the net income returned to

2015 demonstrating strong abil-

ROA is a very powerful ratio to

unit holders. It is strongly related

ity to repay debts. However, they

understand how favorable is ALE

with liabilities as suggested by

remain very volatile and close

for investors. However, it is a use-

the formula. Thus, the decrees in

to lender benchmark of 1.50.

ful ratio if comparing two similar

percentage from 2013-2015 it is

Currently, ALE’s debt interest rate

A-REIT’s. Since this report is

attributed to the slight increase

is at 3.3% (ALE Annual Report

investigating two different trust,

in liabilities of ALE. The 2016, it is

2015), which is considered to be

ROA becomes not very indica-

low as it does reflect only half of

very low.

tive tool to compare. The reason

year. A-REIT sector offers a yield

is related with the fact that dif-

of 4.4 % (Schlesinger 2016 sec.2

The indicated interest cover ratio

ferent companies use resources

par.2). In this circumstances, ALE

of 1.13 in Y 2016, does not pres-

differently. Due to the nature of

is performing better than A-REIT

ent the actual cover ratio. Data

trust, Stockland has much larger

sector. The expected refinanc-

is based till June 2016 which

expanses than ALE. Neverthe-

ing debt of ALE in 2018 will

impacts the ratio to be calcu-

less, table 7 suggests that ROA

cause ROE to increase. However,

lated fully. However, the ratio

of LEP is close to 5% which

ROA is expected to reduce as a

is excpected to be between 1.5

indicates that they are doing an

consequence.

and 1.9 for Y. 2016.

average in managing funds.

23

SSUD71-119

LEP VS. SGP

RETURN ON CAPITAL EMPLOYED Analysing the return on capital employed (ROCE) it is a crucial factor as it determines how efficiently is ALE managing its capital engaged. It is a metrics that further describes the profitability of ALE as well as provides a good suggestion to future investors. The fact that to determine ROCE it is required to consider debts and other liabilities of the company, indicates that it is a preferred method to describe ALE financial performance.

The information in the below table shows that ALE has had a volatile ROCE from one year to the other over the five years of analysis. Investors tend to support stable ROCE’s rather than bounce ones. Demonstrating a not well managed capital.

Given that ALE is engaging a lot of efforts in increasing rental income and lower debt interest over the years (Table 6, Figure 6), it would be natural to expect higher ROCE rates. However, as demonstrated in figure

Net Annual Profit

6, the ROCE is falling regardless of rents increasing. Additionally, as suggested by

Interest Cover Ratio

ROCE

Figure 8: ALE Comparison between NAP, ICR and ROCE

the figure 6, interest cover ratio represents Date Close a high risk.

This is a minus for ALE’s man-

Dividends

1 Y. HPR

Return on Invest.

3 Y. HPR

Return on Invest.

5 Y. HPR

Retu

Jun-16

$4.55

0.200

28.73%

$28,726.29

90.37%

$90,374.53

184.37%

$1

Jun-15

$3.69

0.169

33.05%

$33,051.72

95.47%

$95,467.29

$2.90

0.165

14.78%

$14,775.28

78.13%

$78,131.58

Jun-13

$2.67

0.160

32.24%

$32,242.99

Jun-12

$2.14

0.160

21.05%

$21,052.63

Jun-11

$1.90

2015

2016

agement as it demonstrates a not so well managed capital.

Jun-14

INVESTMENT

RETURN ON CAPITAL EMPLOYED

EBIT Capital Employed ROCE

$100,000.00

YEAR 2011

2012

36.08 $799.42 4.51%

2013

45.65 $749.65

2014

47.1 $844.83

47.74 $851.34

43.26 $921.79

23.8 $1,001.82

6.09%

5.58%

5.61%

4.69%

2.38%

35.12

Table 8: ALE Return on Capital Employed

24

Net Annual Profit

20.57

21.52

26.48

26.95

32.47

Interest Cover Ratio

12.00

13.90

22.10

19.50

19.00

ROCE

50.00

60.00

55.00

56.00

46.00

13.00 adjusted 23.00

SSUD71-119

A-REIT ANALYSIS

HOLDING PERIOD RETURN The empirical evidence, represented in the table below, demonstrates the holding period return (HPR) of an investor over a period of one, three and five years.

Data form the calculation of HPR demonstrates that ALE offers excellent returns over long-term holdings. Obviously, the longterm holding compared to short-term ones are more exposed to risks. Higher the risk higher the returns.

Additionally, the HPR has to be associated with level of debt of ALE. Trust leverage explain the increase in HPR from Jun-14 to Jun-15 for every year as well as for 3 Years HPR. Thus ALE has been very active in portfolio management confirming once more Rowland, Ch. (p.415) that in long-term holdings active management is required to control risks.

Date

Close

Dividends 1 Y. HPR Return on Invest. 3 Y. HPR Return on Invest. 5 Y. HPR Return on Invest.

Jun-16

$4.55

0.200

28.73%

$28,726.29

90.37%

$90,374.53

Jun-15

$3.69

0.169

33.05%

$33,051.72

95.47%

$95,467.29

Jun-14

$2.90

0.165

14.78%

$14,775.28

78.13%

$78,131.58

Jun-13

$2.67

0.160

32.24%

$32,242.99

Jun-12

$2.14

0.160

21.05%

$21,052.63

Jun-11

$1.90

184.37%

$184,368.42

INVESTMENT $100,000.00 Table 9: ALE Annualized Holding Period Return

25.79%

87.99%

1-year HPR

3-year HPR

average return for

average return for

184% 5-year HPR

25

SSUD71-119

LEP VS. SGP

SGP

Stockland introduction Stockland (SGP) group is one of the largest groups trading in A-REIT. It was established in 1952 and listed in ASX five years later in 1957 (Stockland Annual Report 2011). Since than SGP diversified its portfolio to a vast range of traditional and non-traditional sectors in property. Currently the activities of SGP include management of 42 retail centres, development of 65 residential communities, 16 offices, industrial centres and 62 retirement villages (Stockland Annual Report 2016). All properties are spread across main Australian territories.

Highlights 1. Listed since 1957 2. Gearing 38.81% 3. Most properties located in VIC, NSW and QLD. 4. Major activities are construction and retail.

5. Investing only in Australia.

26

SSUD71-119

A-REIT ANALYSIS

STRUCTURE & COMPOSITION SGP has a very complex trust structure. They have properties mainly in the traditional sector of A-REITs. SGP trust owns 70% of assets, and SGP corporation owns 30% current assets (Figure 11).

SGP property group comprises of trust and corporation. The trust owns retail (51%), logistic & business parks (15%) and office (6%). The corporation on the other hand owns Residential properties (19% of total portfolio), and retirement living (9% of total portfolio).

Figure 11: Stockland Portfolio Composition

27

SSUD71-119

LEP VS. SGP

CHARACTERISTICS OF PROPERTY PORTFOLIO SGP has a diversified portfolio across five

of asset. Reasons can be several. A first

sectors of A-REIT. As indicated in figure 7,

general opinion is related with strong

This sample of properties from the

major part of the portfolio is dedicated

competition, very high maintenance and

portfolio of SGP indicates that the

to retail (51%), residential (19%), logistics

operating cost and lack of good quality

properties vary from one another and

and business parks (15%), retirement

properties.

have different values as a consequence

living (9%) and the last are office build-

of WALE, cap rate and yield. Clearly con-

ings with (6%) (Stockland 2016 p.4).

As part of the qualitative research it is

firming that WALE is an important part

This diversified property portfolio of

required to examine the main properties

of income producing properties.

SGP counts for $ 15.8 billion ranking the

owned by SGP. As discussed above, SGP

company in ASX 50.

portfolio its distributed among five main

Table 11, is an overview of the SGP WALE

sectors of properties. For the purpose of

for the span of years under analysis.

Office properties have continued to di-

this report there were observed proper-

minish which indicates that SGP may be

ties owned by the trust being, retail,

preparing a smooth exit from this type

industrial and offices.

Table 11: SGP property valuation

Commercial Portfolio

28

Residential Portfolio

Retail

Logistics & Business Parks

Residential Communities

42 properties 1,046,629 sqm GLA* Stockland’s ownership interests valued at $6.8 billion and gross book value of $7.2 billion * Reflects 100% interest

27 properties 1,299,308 sqm GLA* Stockland’s ownership interests valued at $2.0 billion and gross book value of $2.2 billion * Reflects 100% interest

56 communities 76,800 lots remaining End-market value approximately $18.8 billion

SSUD71-119

A-REIT ANALYSIS

SGP PORTFOLIO PROPERTY ASSET

1090-1124 Centre Road, VIC

Durack Centre, WA

72-76 Cherry Lane, VIC

Stockland Rockhampton, QLD

Retail

Industrial

Office

Industrial

Retail

1. Myer 2. Kmart 3. Coles 4. Woolworths

1. Specialty Packaging Group Pty Ltd 2. Avery Dennison 3. Amcor

1. Jacobs 2. Shell 3. Australian Bureau of Statistics 4. Stockland Development 5. College of Law

1. Toll Holdings Ltd

1. Kmart 2. Big W 3. Coles 4. Woolworths 5. Birch Carroll and Coyle Cinemas

$484.20

$60.00

$116.00

$31.70

$272.60

WALE (in years)

9.6

4.6

3.9

4.5

5.1

CAP RATE

5.75%

9.25%

8.00%

7.00%

6.00%

YIELD

8.00%

10.00%

8.75%

8.25%

8.50%

ADDRESS

ASSET TYPE

KEY TENANTS

VALUE (in million AUD)

Stockland Shellharbour, NSW

Retirement Portfolio

Office Portfolio

Unlisted Portfolio

Retirement Living

Office

Unlisted Property Funds

70 established villages over 9,600 units Development pipeline of over 3,100 units Funds employed $1.3 billion

9 properties 153,895 sqm NL A* Stockland’s ownership interests valued at $0.8 billion and gross book value of $1.1 billion * Reflects 100% interest

Funds under management $85.3 million

29

SSUD71-119

LEP VS. SGP

SGP

GEOGRAPHIC DISTRIBUTION Figures from the annual report establishes that the properties of Stockland are situated in four states across Australia (Stockland 2016). It is long-established that the investments are focused in Australia eliminating thus any risks related with international investments.

Graphics below, compare the weight of geographical distribution versus investment value. The main idea behind this analysis is to check if there is any state who is not performing well in terms of property value. Eventually this leads to a better understanding of management qualities of Stockland.

Results demonstrate that mainly there is a balanced distribution between geographical distribution and Fair Value of property. As indicated in the left side map 45% of retail properties is located in NSW and it contributes 54% of overall retail value. Outperforming thus QLD,VIC and WA. Similar result is shown in the office sector as well. As expected NSW, being among the top economies in Australia, contributes the most in the value of portfolio.

8 WESTERN AUSTRALIA

SOUTH AUSTRALIA

Retail Logistics and Business Parks Office Residential Retirement Living

30

SSUD71-119

A-REIT ANALYSIS

QUEENSLAND

20

2

14 VICTORIA

25 NEW SOUTH WALES

31

SSUD71-119

LEP VS. SGP

portfolio distribution

Main geographical areas where LEP concentrate their investment are VIC (38%) and QLD (37%). However, only VIC is contributing more towards the total value of portfolio (48% weight).

WHERE IS SGP INVESTING Graphics below, compare the weight of

geographical distribution and Fair Value

Interesting results are exhibited when

geographical distribution versus invest-

of property. As indicated in the left side

observing the logistic sector. According

ment value. The main idea behind this

map 45% of retail properties is located

to figure 14, in SA are concentrated only

analysis is to check if there is any state

in NSW and it contributes 54% of overall

3% of the total logistic & business park

who is not performing well in terms of

retail value. Outperforming thus QLD,VIC

portfolio but it contributes 6% in the

property value. Eventually this leads to

and WA. Similar result is shown in the

total value of this type of portfolio. Out-

a better understanding of management

office sector as well. As expected NSW,

performing other states where similar

qualities of Stockland.

being among the top economies in Aus-

investments are owned by Stockland.

tralia, contributes the most in the value

This increase in value is explained by

of portfolio.

the strategic location of the property in

Results demonstrate that mainly there is a balanced distribution between

Adelaide. However, the low WALE of 2.1 is the downside of this property.

41%

Figure 12: Retail Spread of SGP

41%

41%

Figure 14: Logistic Spread of SGP

Figure 16: Office Spread of SGP

Figure 15: Logistic Value of SGP

Figure 17: Office Value of SGP

32 Figure 13: Retail Value of SGP

SSUD71-119

A-REIT ANALYSIS

MOTIVATION & INVESTMENT STRATEGY Further, the report explores the motivation behind the investment strategies of SGP. Researchers (Newell 2005; Newell & Peng 2008) have identified that factors influencing the investment strategy of listed trusts in general in Australia include: tax changes, economic factors, competition within the market, performance and green ratings. Clearly this macro-factors influence the decision making when acquiring new assets. Additionally, by observing the composition of portfolio and its geographical spread, the report explores the motivating factors specifically related to the selected trust being SGP. MOTIVATING FACTORS FOR LEP INVESTING IN PUBS History and experience add to today’s performance of SGP in traditional and non-traditional sector. A reputation that they

VERY IMPORTANT • Composition of trust structure;

maintain by acquiring prime properties which make news and

• Green Ratings;

contribute to future increase of trust. As the property compendi-

• Geographic Location;

um suggested, SGP strategy is to acquire properties in prime loca-

• Competition.

tions, with green ratings above 4.0 and possibly recently build. A major contribution to investment strategy of SGP arrives from the composition of trust structure who demonstrate to be risk avert.

Factors such as age of building, cap rates, stability of returns and age of building tend to be second important group of motivating factors. Usually, a property that is in a prime location and which

IMPORTANT

has acquired green rating above 4, affects positively the factors

• Stability of returns;

categorized under Important section in table 13.

• Prime properties; • Capitalisation Rate;

Less important factors influencing in investment of SGP are re-

• High Yields;

lated with current vacancies and lease terms of the asset. They are

• Age of building.

micro management issues that influence less the opportunity to acquire a prime property in a key location.

Table 13 is not an exhaustive list of factors that influence investment strategy of SGP. They are based on interpretation of the comments under property compendium of SGP. More factors can

LESS IMPORTANT

be explored by observing internal management of the trust as

• Vacancies;

well as its past performance of SGP.

• Lease terms;

33 Table 13: SGP Investment Motivating Factors

SSUD71-119

LEP VS. SGP

historic performance

SGP

Figure 18: SGP vs ASX 300 5 Year (Source: marketindex.com.au)

Mean: -0.017% Stdv: 1.311%

SGP VS A-REIT & ASX 300

SGP VS A-REIT & ASX 200

Figure 18, demonstrates the 5-year per-

Comparing SGP with ASX & A-REITs 200

formance of SGP and ASX 300. In gen-

for a period between 2011 until 2016

eral, SGP is under performing in com-

demonstrates that SGP is outperforming

parison with ASX 300. However, there

them in a five-year span.

are times that SGP was over performing

Using mean and standard deviation

the ASX 300. SGP over performed dur-

assists understanding what the return of

ing the entire 2016. However, the trend

SGP was during the years under analysis.

demonstrates that most likely in the first quarter of 2017 will under perform

Mean: -0.017% for LEP

In most times SGP has provided

ASX300. Although, the buffer between

Standard Deviation: 1.311%

a return to its investors between

SGP and ASX300 might be very small.

-2.639% and 2.605%.

SGP has provided its investors with a SGP turnout is 4.24 dollars for every

returns between -2.639% and 2.605%.

dollar invested. With the red line is ASX

This data is achieved by adding and sub-

300 index which demonstrate that

stracting mean and standard deviation.

in a general equity market they have delivered 8.2% p.a. Whereas general

Observing the index behavior of SGP

property trusts have only delivered 5.4%

compared to ASX and A-REIT 200, it is

p.a. Comparison between ASX 300 and

suggestible that there is a strong correla-

SGP, indicates that SGP is underperform-

tion between SGP and ASX performance.

ing in general equity market consistently

SGP and ASX 200 maintain almost the

over the 5-year period. This is considered

same buffer zone as ASX200 with A-

as a normal thing for a complex and big

REIT200 sector.

structure as SGP. Thus, improving its performance in the market it requires time.

34

SSUD71-119

A-REIT ANALYSIS

LEP 250%

200%

150%

100%

50%

0% 1-Jul-11

1-Jul-12 Figure 19: SGP vs ASX & A-REIT 200. Five-year span

1-Jul-13

1-Jul-14

A-REIT 200

Graphic (Figure 19) confirms the fact

ASX 200

1-Jul-15

LEP

AUS 10-Y BOND VS SGP PORTFOLIO CAP RATES (FIGURE 20).

that SGP is a major company in A-REIT. SGP creates the trend for A-REIT its

Australian government bond rates fell significantly (more than 3%) during this 10-years.

movements in market are often dictated

During the same period, SGP experienced a slight increase of 0.31%. Thus, approving

by what influences A-REIT’s in general.

Rowland (2010) statement of negative correlation between cap rates and bond rates.

In most parts, SGP and A-REIT 200 are

Currently, SGP portfolio cap rates exceed the long term- bond rates by nearly 4%. SGP can

closely correlated with a very small buf-

resist any possible increase in bond rates, as expected in the beginning of 2017, with the

fer zone. However, during end of 2013

acquired buffer zone.

until beginning of 2014 when A-REIT in general underperformed, SGP continued to maintain a strong position in the market demonstrating a stronger relation with ASX than A-REIT’s.

Chart Title 9.00%

8.00% 7.50%

Further, the report measures SGP portfolio cap rates against Australian 10-year Bond Rates. Rowland (2010 p.415) describes the correlation between A-REIT’s and bond rates as being negative. Sug-

7.00%

6.00%

as we have seen recently in the markets,

2.00%

of SGP support possible increase in bond rates? Figure 20, provides results from this comparison. AUS 10-y bond vs SGP portfolio cap rates.

8.00% 7.93%

7.30%

7.40%

8.30%

8.40%

8.50%

7.73% 7.70%

7.90% 7.80%

7.90% 7.80%

7.20%

7.10%

7.00%

6.83% 6.70% 6.45% 6.30%

5.80%

8.30% 7.70% 7.60% 6.80%

8.00% 7.40% 7.30%

7.40% 7.20% 6.90%

6.50% 6.10%

5.52% 5.10%

5.21%

4.00%

3.00%

tion rate of SGP. Can portfolio cap rates

6.50% 6.43% 6.26%

8.40%

7.90% 7.87%

5.00%

gesting that an increase in bond rates, would negatively impact the capitaliza-

7.00%

8.40%

3.76%

3.54%

3.04%

3.01%

2.76%

1.00%

0.00% 2007

2008

2009

2010 Australian Bond

Figure 20: SGP Cap. rates VS Australian 10 Year Bond rates

2011 Retail

2012 Logistic

2013 Office

2014

2015

2016

Portfolio

35

SSUD71-119

LEP VS. SGP

FINANCIAL PERFORMANCE Quantitative data provide further analysis for SGP financial performance. Balance sheet along with other key indicators such as NTA ratio, premium/discount to NTA (and many more), provide more in depth view on SGP financial performance. Finally, the report relied on Book-To-Market Ratio to determine the value of SGP BALANCE SHEET Net tangible asset of SGP have developed with nearly 5% from the year 2011. Indicating an average of 1% for every year. This is a significant increase considering the big assets that Stockland holds and acquires for its portfolio. Such increase is to a similar degree as ALE growth of NTA of 7% p.a.. A major contribution to the indicated increase of NTA arrives from portfolio valuation along with good performance of SGP in residential sector. Market capitalization rates continued to increase with an average of 8% as a consequence of steady increase of NTA (table 14).

36

8.0% 6.0% 4.0% 8.0% 2.0% 6.0% 0.0% 2010 4.0% -2.0%

2011

2012

2013

2014

2015

2016

2017

2.0% -4.0% 0.0% -6.0% 2010 -2.0% -8.0%

2011

2012

-4.0% -6.0% 25.0%

2013

2014

2015

2016

2017

NTA AVERAGE MOVEMENT Figure 21: SGP NTA & Market Cap. Rate movements

-8.0% 20.0% 15.0% 10.0% 25.0% 5.0% 20.0% 0.0% 15.0% 2010 -5.0% 10.0% -10.0% 5.0% -15.0% 0.0% -20.0% 2010 -5.0%

2011

2011

2012

2012

2013

2013

2014

2014

2015

2015

2016

2016

-10.0% -15.0% -20.0%

CAP RATE MOVING AVERAGE Figure 22: Market Cap. Rate Moving Average

2017

2017

SSUD71-119

A-REIT ANALYSIS

Balance sheet Table 14: SGP Balance Sheet

BALANCE SHEET

YEAR

$Millions as at 30th June

2011

2012

2013

2014

2015

2016

Units on Issue

2381.56

2203.55

2304.38

2324.27

2359.1

2388.16

Cash

$194.60

$135.60

$227.10

$231.00

$170.00

$208.00

Receivables

$187.40

$200.80

$169.00

$119.00

$103.00

$134.00

$1,290.40

$1,191.30

$810.70

$1,256.00

$881.00

$1,069.00

Current Assets

Other Total Current Assets

$1,672.40

$1,527.70

$1,206.80

$1,606.00

$1,154.00

$1,411.00

Non-Current Assets Investment Properties

$1,242.40

$700.00

$621.30

$656.00

$542.00

$892.00

Property

$9,386.70

$9,768.00

$9,799.00

$10,341.00

$11,252.00

$12,376.00

Other Assets

$2,269.70

$2,538.20

$2,442.50

$2,297.00

$2,781.00

$2,263.00

Total NCA

$12,898.80

$13,006.20

$12,862.80

$13,294.00

$14,575.00

$15,531.00

Total Assets

$14,571.20

$14,533.90

$14,069.60

$14,900.00

$15,729.00

$16,942.00

Current Liabilities Deferred Tax Liability Debt Other Total Liabilities Net Tangible Assets Distribution Per Unit (cent) Market Price (30th June) per unit Market Capitalisation

$2,267.70

$2,524.30

$2,801.80

$2,953.00

$3,293.00

$3,714.00

$55.30

$15.20

$0.00

$0.00

$0.00

$0.00

$2,511.60

$2,762.10

$2,352.40

$2,815.00

$3,030.00

$3,319.00

$937.20

$1,004.90

$720.60

$834.00

$619.00

$655.00

$5,771.80

$6,306.50

$5,874.80

$6,602.00

$6,942.00

$7,688.00

$8,799.40

$8,227.40

$8,194.80

$8,298.00

$8,787.00

$9,254.00

$0.237

0.24

0.24

0.24

0.24

0.245

$3.370

$3.080

$3.480

$3.880

$4.100

$4.710

$8,025.86

$6,786.93

$8,019.24

$9,018.17

$9,672.31

$11,248.23

37

SSUD71-119

LEP VS. SGP

key indicators

of financial performance SGP financial performance is built by analyzing the following indicators: NTA per share, Premium (discount) to NTA, Debt-to-Property Assets, Liabilities to total assets and historic yields.

Table 15: SGP Financial Performance Indicators

SGP share prices were trading at an average of 9.48 % discount to NTA during 2011 until 2013 (Table 16). Year 2012, presents a good opportunity for investors to buy SGP shares. SGP buyers are probably trading long term which explains the steady increase to NTA after 2012. In first quarter of 2016, NTA traded at a premium of 21.55%.

The current performance of SGP represents a good opportunity to sell for those who traded at a discount NTA in 2012. Therefore, a decrease in NTA is expected in the coming quarter of 2017.

38

Some factors contributing to SGP trading at a premium to its asset value are related with: Increased confidence in A-REIT market in general; Increased portfolio performance of residential properties; Debt structure; Possible increase in value of held properties.

SSUD71-119

A-REIT ANALYSIS

Book - To - Market Ratio The Book-To-Market ratio is considered to establish the value of SGP. Comparing book value with market capitalization of SGP will provide a ratio suggesting if the company is undervalued or overvalued. If above 1.0 the value of company is undervalued, if under 1.0 the company is overvalued.

Currently, SGP book-to-market ratio sits on 0.82. Data (table 17) suggests that SGP is overvalued. SGP, during 2011 until 2016 has improved its value. However, data does not necessary suggest that SGP value will continue to be overvalued. Recent market conditions can cause investors to sell with the current market value. Causing market capitalization to fall and eventually affecting book-tomarket ratio.

Table 16: SGP Book-To-Market Ratio 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2010

2011

2012

2013

2014

2015

2016

2017

39

SSUD71-119

LEP VS. SGP

PROFITABILITY Evaluation and interpretation of further data is necessary to acquire a better insight on SGP financial performance. Three are the key metrics examined under this section; the Income Statement along with another table which includes return on Assets, Equity and Interest Cover Ratio and the return on capital employed ratio.

INCOME STATEMENT Firstly, the income statement provides a focused view on the net annual profit of the company.

This allows to understand what is the company receiving, the level of debt paid and the sum of both determines the profit inflow of the company.

Table 17: SGP Income Statement

40

As noted in table 18, The table below represents an overview of the Net Income for the five years under investigation. SGP’s Net Annual Profit (NAP) has increased in an average of 1.55% p.a (table 17).

SSUD71-119

A-REIT ANALYSIS

ability to generate earnings Profit margins (Table 18) are used to examine how effective SGP is using their resources. The ratios under investigation, as per reference to Easton, P. (2001), are Return on Assets (ROA), Return on Equity (ROE) and Interest Cover ratio.

Table 18: SGP profitability margins

ROA

ROE

INTEREST COVER RATIO

Has experienced several changes

Represents the net income

Is beyond benchmark of 1.50.

during the five-year period

returned to unit holders and is

Clearly indicating the strong

under analysis. SGP has achieved

expressed in percentage. For-

ability of SGP to pay depts.

an average of 4.82% ROA from

mula demonstrates a strong rela-

Confirming the assigned ‘BBB’

2011 until 2016. This indicates

tion between ROE and liabilities.

credit rating. In this ratio, SGP

that SGP have managed effec-

Thus, the decrees in percentage

is performing better than LEP

tively their resources. While the

from 2012-2013 it is attributed

which the credit rating is ‘Bbb’.

structure and portfolio manage-

to the slight increase in total

Credit ratings provide a good in-

ment of SGP is very complex,

liabilities of SGP. Overall, SGP

sight on how risky is a company

their ROA is performing better

from 2011 until 2016, delivered

in lenders eye.

than LEP. However, this can not

an average of 7.26% on equity.

be compared directly as men-

Schlesinger (2016 sec.2 par.2) in-

tioned.

dicates that for the same period A-REIT sector offers a yield of 4.4 %. Under this circumstances SGP is outperforming A-REIT’s.

41

SSUD71-119

LEP VS. SGP

return on capital Return on capital employed investigates further how efficiently SGP manages its funds.

Data from table 19 demonstrate for a volatile ROCE. Movements of more than 2% every two years are a sign that not a lot of investors will support. However, the fact that ROCE is steadily increasing since 2013 can seem attractive for many other investors.

Overall, table 19 demonstrates for an average capital management of SGP. Figure 16 is a visual representation of the Net Annual Profit, ROCE and the interest cover ratio over five-years. NAP, looks steady and continuing to move upwards which indicates the commitment of SGP in increasing the annual profits (figure 16).

Interest cover ratio and ROCE seem to be in the same trend, indicating for a correlation between this two ratios.

Table 19: ALE Return on Capital Employed

42

Figure 23: SGP Comparison between NAP, ICR and ROCE

SSUD71-119

A-REIT ANALYSIS

HOLDING PERIOD RETURN The empirical evidence, represented in the table below, demonstrates the holding period return (HPR) of an investor over a period of one, three and five years.

Data form table 20 demonstrates SGP offers stable returns over 3 and 5-years holding period. Obviously, the long-term holding compared to short-term ones are more exposed to risks. Higher the risk higher the returns.

In short-term, SGP is very volatile. As demonstrated in table 20, during the first holding period, SGP performed poorly offering a loss of -1.48%. As a conclusion, table 21 establishes that SGP is a long-term trader and focuses all its managing efforts in avoiding risks related with long-term. Contrarily, LEP offers very good returns during for one-year holding period as well as long-term.

However, LEP management is focused more in short-term.

14.08% average return for

50%

average return for 3-year HPR

75.52% 5-year HPR

1-year HPR

Table 20: SGP Annualized Holding Period Return

43

SSUD71-119

LEP VS. SGP

market

commentary “The market is the sum of all wisdom and all stupidity of everyone who trades it”.

Dennis Gartman.

Figure 27: Euro/dollar and German 30 index on 5th December 2016 after Italian referendum

INTERNATIONAL OUTLOOK

strength against the US dollar.

The end of 2016 is set to be as interesting as its last quarter. Following BREXIT

The first quarter of the coming year 2017

and US elections are the OPEC decision

are set to be interesting as well. Some

to reduce production of crude oil to a

interesting events which are expected

32.5 million barrels per day (The Aus-

to occur in the beginning of 2017 are

tralian 2016), Italians voting NO to the

related with the French elections, the ac-

referendum have caused a significant

tual happening of BREXIT and obviously

movement in global markets as well.

Figure 24: Effect of Italy voting NO on EUR/USD (graph: index.com)

OPEC decision to reduce the amount of

44

the new president of US starting its job officially. Each of this expected events will definitely impact the global market.

oil caused oil prices spiking over 14% in

two main banks in Italy ‘Banca Popolare

3 days (CNN Money 2016). On the other

dell’Emilia Romagna’ and ‘Monte dei

IN FRANCE, the decision of the ongo-

hand, the recent Italian elections added

Paschi di Siena’ dropped 2% and 5.4%

ing president Francois Hollande not to

more to the market performance in Eu-

respectively (marketwatch 2016). Over-

run for re-elections could mean that

rope. Italian 10-year bond drooped and

all, this contributed to euro which lost

the socialist Marine Le Pen has better

SSUD71-119

A-REIT ANALYSIS

of sellers is just about to outperform

opportunities to win. In the case of such occurrence, France will deeply reform its

DOMESTIC MARKET

economy leading to further uncertainties in the market.

Currently the market in Australia demonstrate to have a very low appetite for

BREXIT, the actual happening, is another

risk. Recent developments with China

interesting event of 2016. During 2016

deciding to import more coal have

market experienced a hard time from

benefited the mining prices of Austra-

BREXIT wining. However, the actual

lia. This could indicate that the current

happening of BREXIT is sought to have a

market conditions are calling for a better

bigger impact than the referendum vote.

performance of ASX top 20. This will af-

the number of buyers, and when this happens the market enters into a bear period (figure 17). With the green line (figure 17) is the number of total buyers, which according to Mr. Vandyck is going over the yellow one and when this is a strong indicator of bear market.

However, the graphic compiled by Mr. Vandyck, doesn’t indicate how long this situation will last.

fect directly the performance of A-REIT’s.

TRUMP TAKING OVER. Lastly, the new

Previously large cap managers removed

In circumstances where there are more

elected President of US will start his job

their money from top 20 and invested

sellers than buyers, non-traditional

in January 2017. The election of Trump

in small cap rates. A-REIT were positively

trusts such as LEP will suffer more than

caused a lot of movement in the market.

impacted by this conditions. However,

traditional sector being in this case SGP.

Commodities went up, US dollar went

there are signs of cap managers going

Although the non-traditional sector

up causing bonds to increase in the rest

back to large stocks such as mining and

tends to be less affected by international

of the world including Australia. On the

banks as they represent safer position in

factors, it hard to say that they won’t

other hand, China, is expected to take

the current market conditions.

struggle with a slight increase in interest rates.

serious measures to protect its economy as a consequence of Mr. Trump declara-

According to FNArena editor Rudi

While, traditional sector of A-REIT seems

tions. This measures include importing

Filapek-Vandyck (2016), Australia is

less risky at the moment, the future

of mining commodities which happened

starting to go through a bear market.

direction is hard to predict. Having said

suddenly recently and the first country

Thus, confirming the international situa-

that, the prospect of higher bond yields,

profiting of this was Australia.

tion of markets. Mr. Vandyck, explained

lower AUS dollar combined with a pos-

in his interview in Sky news program

sible government decision to reduce

According to Short (2016), the interna-

Switzer, that according to his indica-

housing construction activity will likely

tional markets are now through a bear

tors, in Australia is now the time where

put a lot of pressure in SGP which have

market period. This indicates that in

investors should be more careful when

recently settled a debt with an American

general the market is now selling. With

investing in ASX 200. His warning signals

lender.

more people taking money out of the

are based on the fact that the number

market the prices drop further.

Figure 16 demonstrates the major world indexes falling with more than 20% from 2009 until December 2016. This indicates a risky quarter for the beginning of 2017.

Figure 25: Global Bear markets (source: investing.com)

Figure 26: Buyers Vs Sellers in Australian Market (Source: Sky News Money 2016)

45

SSUD71-119

LEP VS. SGP

Chart Title

SUMMARY

250.00% 200.00%

key ratios

150.00% 100.00% 50.00% 0.00% 18-Nov-10

01-Apr-12 A-REIT 200 Index

Figure 27: Mapping A-Reit, ASX, LEP and SGP index

PREDICTED PRICE 2017 Table on the right side uses previous data to make an arethmetical prediction on what can arethmeticaly possibel to be the price for SGP and LEP. NPV. The price than was net present valued to initial year being 2011 to help understand which of the two stocks has provided a better value for maney during the five-year under analysis.

Results demonstrate that LEP has a possibility to have higher price in 2017.

Stock for LEP arithmeticaly, will be worth $5.74 per unit which indicates a continued growth of LEP along its current trend.

The predicted price of 2017 is present valued back to 2011 and the amount was $1.84 for LEP and 3.28 for SGP. This suggests that LEP has a slight drop in dollar value of $ -0.06. In the other hand SGP has a depriciation of $-0.09. Indicating that LEP was a better investment for the analysed years.

46

14-Aug-13 ASX 200 Index

27-Dec-14 LEP Index

10-May-16 SGP Index

22-Sep-17

SSUD71-119

A-REIT ANALYSIS

LEVERAGE RATIO

SGP

1.83 ratio has increased in 5-years

COVARIANCE Covariance demonstrates that when LEP is compared with ASX and A-REIT as banchmark, produces a beta of 2.366 and 1.52 respectively. Indicating very high volatility and high risk of LEP against ASX and A-REIT. Moreover, the beta of LEP agains SGP

LEP

2.08

downward trend

is 1.3 which means 30 % more volatile than SGP. However, due to the nature of trust it is hard to compare. Nevertheless, the message is that traditional trusts tend to be less volatile than the nontraditional sector.

LEVERAGE RATIO Data from morningstar indicate that LEP is currently highly leveraged. However, a downtrend is noticed from 2011 until 2016. Contrary, SGP has a very good leverage. Credit rating of BBB supports a strong capacity of SGP to repay debt.

KEY RATIOS It is hard to compare this two companies due to their nature.

However, this ratios provide an otlook on how traditional and non-traditional markets perform. * Key ratios indicate that SGP is outperforming LEP in relation to how they manage their assets. LEP, on the other hand is presented to be very highly leveraged but they provide a very good divident yield. LEP is traded in very high premium. *Note: Interest Cover ratio of

PERIOD RETURN STOCKS

LEP does not reflect the real

Table below confirms the results from Covariance table. Investors received higher returns from

one. Data is missing for the

2015 until 2016 from LEP than SGP. The volatile nature of LEP allowes for higher return.

calculation to be done prop-

However, this is does not indicate that LEP will continue to provide high returns in the future.

erly. The ratio is expected to be between 1.5-1.9

47

SSUD71-119

LEP VS. SGP

Risk analysis

SGP

LEP

Risks associated with investment in SGP

Risks associated with investment in LEP

INTERNATIONAL DEBT

VOLATILITY

SGP has recently acquired a debt

In current market conditions simply

from USA. An increase in US dollar

investors can not afford to take risks.

will affect debt-to-equity ratio.

CONSTRUCTION ACTIVITY

DEBT AND DIVIDENDS

State governments in AUS are con-

Rifinancing in 2018 indicates that

stantly debating about reducing

LEP are raising capital thus dividends

housing activity.

will be impacted.

OFFICE MARKET

MARKET

As SGP is slowly going out of office

Non-traditional sector of A-REIT

market, the market conditions can

has performed well during the last

affect their current performance.

5-years. During the same period ASX 20 has not performed well. It

ASX 20

is uncertain if LEP will continue to perform better as ASX 20 starts to

With banks and mining starting to perform better, Cap managers wll pull more money out of A-REIT’s.

Causing SGP price to go down for the first and second quarter of 2017.

48

pick up.

SSUD71-119

A-REIT ANALYSIS

CONCLUSION Overall, the market looks that will go through some rough times during the beginning of 2017.

ASX top 20 will be kick-started by the international market environment causing A-REIT to rethink their investment strategies and probably focus more in managing the current assets rather than buying new ones. The data used to analyse the two selected property trust along with the international market overview, indicate that A-REIT’s are somewhere near the top of the earnings cycle, which will ultimately be reshaped by the possible increase in bond yields and higher interest rates. This is confirmed by NTA of both selected trusts which are trading at premium NTA. The first quarter of 2017 is to be observed as it will determine many things on whether it is safe to invest in non-traditional sector or the traditional one.

Market commentary indicates that financial markets in Australia are entering a bear period. Under a bear market, investors are selling more than buying. Such occurrence forces stocks to go down as money starts to pull out. As a consequence, A-REIT stock will be affected and so will LEP and SGP. Falling of stock prices forced by high sell do not indicate that LEP and SGP are doing a bad job managing their companies but simply there are more sellers out there than buyers.

Under bear market circumstances, non-traditional sector tends to suffer more. Financial ratios indicate LEP being more volatile than SGP. Hence, LEP can experience a drop in price during the first quarter of 2017.

Traditional sector on the other hand, reveals a high covariance with A-REIT. Accordingly, what impacts A-REIT, will impact stocks of SGP as well. However, traditional sector is less volatile than the non-traditional one. Thus, SGP will be impacted less than LEP in a bear market set ahead.

Judging on ratios and market commentary, the report indicates that it is not the right time to invest the $100.000 yet. If the market starts to drop, eventually will reach a point of resistance when will start to pick up. That will be the right time to invest. Based on market commentary, second quarter of 2017 will provide much better environment to enter in market.

Investment on SGP is long-term as its price is expected to rise due to Banks and Mining performing better. However, factors affecting non-traditional markets in A-REIT are yet to be explored thus the price of LEP might spook up as more investors will try to diversify profits coming from investments in Bank, Mining or other commodities. The sound suggestion under current market conditions is managing risk by spreading the investment in two portfolios.

LEP is more appealing, judging on my high appetite for risk. However, SGP provides a safer option for the times ahead although they offer lower returns. Under this circumstances, I would suggest investing 65% under SGP and 35% with LEP.

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Australian Institute of Health and Welfare 2014, National Drug Strategy Household Survey detailed report 2013. Drug statistics series no. 28. Cat. no. PHE 183. Canberra: AIHW. Accessed 24 November 2016 http://www.aihw.gov.au/WorkArea/DownloadAsset. aspx?id=60129549848.

Australian Accounting Standards Board 2011, Fair Value Measurement. Victoria: AASB. Accessed 25 November 2016 http://www.aasb. gov.au/admin/file/content105/c9/AASB13_09-11.pdf.

Dobson, C. and Hooper, K. (2015). ‘Insights from the Australian Tourism Industry’ Reserve Bank of Australia Bulletin, March Quarter 2015, accessed 24 November 2016, http://www.rba.gov.au/publications/bulletin/2015/mar/pdf/bu-0315-3.pdf.

Easton, P. Taylor, G. Shroff, P. Sougiannis, Th. (2001) ‘Using forecasts of Earnings to Simultaneously Stimulate Estimate Growth and the Rate of Return on Equity Investment’ Journal of Accounting Research, Vol. 40, No. 3 (Jun., 2002), pp. 657-676. Accessed 28 November 2016, http://www.jstor.org/stable/3542268 Egan, M. 2016, ‘OPEC deal sends oil spiking 14% in 3 days’. CNN Money accessed 04 December 28, 2016 http://money.cnn.com/2016/12/02/ investing/oil-prices-spike-opec-meeting/index.html Faucon, B. 2016, ‘OPEC reaches deal to cut oil production’. The Australian accessed 01 December 28, 2016 http://www.theaustralian.com. au/business/markets/oil-surges-on-reports-that-opec-is-close-to-a-deal/news-story/65896c0eb59f776d3ebe89e90b36928a Morgan, R. 2014 ‘Gold Coast is Australia’s preferred destination for long holiday’, Roy Morgan Research 14 April 2014, accessed 24 November 2016, http://www.roymorgan.com/findings/5537-gold-coast-australias-preferred-destination-for-long-holiday-201404140129.

Newell, G. (2005) ‘Factors influencing the performance of listed property trusts’, Pacific Rim Property Research Journal, 11:2, 211-227. Accessed 24 November 2016, Main Library Bond.

Newell, G. & Peng, H. (2008) ‘LPT fund manager decision making in the emerging property sectors’, Pacific Rim Property Research Journal, 14:2, 222-232. Accessed 24 November 2016, Main Library Bond.

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Accessed 24 November 2016, Main Library Bond.

Schlesinger, L. 2016 ‘Rising bond yields drag down A-REIT. Australian Financial Review accessed 25 25 November 2016 http://www.afr. com/personal-finance/shares/listed-investment-companies/rising-bond-yields-drag-down-areits-20161002-grt3nt Stockland Group 2016, Annual Review 2016. Accessed 1 December 2016 https://www.stockland.com.au/corporate-reporting/downloads.

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Rowland P (2010) Australian Property Investment and Financing; Thompson Reuters Sydney (2010)

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List of Figures and Tables Figure 1: LEP property valuation Figure 2: Geographical Spread of ALE’s Properties Figure 3: Value of State Portfolio Figure 4: Australian Tourism Expenditure (Source: ABS 2016) Figure 5: Domestic vs International Tourism patterns (Source: ABS 2015) Figure 6: Proportion of drinkers in Australia (Source: AIHW 2013) Figure 7: Comparison between LEP, AREIT 300 and ASX 300 Figure 8: Comparison between LEP, AREIT 200 and ASX 200 Figure 9: ALE Cap. rates VS Australian 10 Year Bond rates (Source ALE Annual Report 2016) Figure 10: ALE Comparison between NAP, ICR and ROCE Figure 11: Stockland Portfolio Composition Figure 12: Value of Retail (SGP) Figure 13:Value of Logistic (SGP) Figure 14: Value of Offices (SGP) Figure 15: Distribution of retail (SGP) Figure 16: Distribution of Logistics (SGP) Figure 17: Distribution of Offices (SGP) Figure 18: SGP vs ASX 300 5 Year (Source: marketindex.com.au) Figure 19: SGP vs ASX & A-REIT 200. Five-year span Figure 20: SGP Cap. rates VS Australian 10 Year Bond rates Figure 21:SGP NTA & Market Cap. Rate movements Figure 22: SGP Comparison between NAP, ICR and ROCE Figure 23: Effect of Italy voting NO on EUR/USD (graph: index.com) Figure 24: Global Bear markets (source: investing.com) Figure 25: Buyers Vs Sellers in Australian Market (Source: Sky News Money 2016) Table 1: Motivating Factors for ALE Investment Strategy Table 2: ALE Management areas Table 3: ALE Balance Sheet Table 4: ALE Financial Performance Indicators Table 5: ALE Book-To-Market Ratio Table 6:ALE Income Statement Table 7: ALE profitability margins Table 8: ALE Return on Capital Employed Table 9: ALE Annualized Holding Period Return Table 10: Stockland Portfolio of Properties (Data retrieved from Stockland Property Compendium 2016) Table 11: Stockland Selected properties Table 12: Stockland WALE Table 13: SGP Investment Motivating Factors Table 14: SGP key portfolio management areas.

Table 15: SGP Balance Sheet Table 16: SGP Financial Performance Indicators Table 17: SGP Book-To-Market Ratio Table 18: SGP Income Statement Table 19: SGP profitability margins Table 20: ALE Return on Capital Employed Table 21: SGP Annualized Holding Period Return

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Mario Shllaku