A number of REITs announced their 3Q19 operational updates yesterday.
Dexus forecast 5% underlying earnings growth. reaffirmed its FY19 guidance for 5% growth.
Mirvac indicated their FY19 guidance will be in the 3 – 4% growth range with DPS growth at 5%.
Across the sector it is likely residential and retail remain the weak spots, whilst office and industrial will continue to provide strong growth. Softening of the retail sector was evident in GPT’s March quarter business update.
Despite GPT’s exposure to retail, the office exposure along with the groups strategy to expand the footprint in logistics, makes the stock one of our preferred opportunities within the REIT sector.
As the US yield curve flattens, which is caused by the long-end of the curve no longer increasing at the same rate as the shorter-end, we’ve started to see institutional money flow back into ASX listed yield sensitive names.
Our preference among these, within the property sector is GPT, SGP, and WFD, (based on valuation grounds).
Within Utilities and Infrastructure, we continue to like AGL, SYD and TCL.
After the strong rally in SGP, LLC, GPT and MGR, the price action looks to be rolling over, pointing lower, and we’ll watch these names closely. SGP appears to be showing the most selling pressure with the current price action taking out the 4.74 low formed on the 26th of April.
Our Algo Engine generated a buy signal on MVA.AXW (Vaneck Vectors Australian Property ETF) back in November at around $18.40, the ETF traded up to $21.30 and in the last week it’s starting to run into selling pressure.
The sell-off in property trusts and infrastructure names has been substantial, 15 to 20% since early September.
The REIT sector has underperformed as bond yields have rallied. The repricing has seen the dividend yield of REIT’s back above 5%.
Historically, the correlation between Australian yield names and US 10-year yields has been inverse; as US yields fall, Australian property trusts and infrastructure stocks rise.
US 10-year bond yields have risen by 79 basis points, or over 50%, since early October. We see this pace as unsustainable and expect the local yield names to trade higher as the US Treasury yields drift lower.
We continue to track WFD, GPT, SGP, SYD and TCL versus the US10 year bond yields.
Over the last two months, bond markets have been repricing the probability of a US rate increase. During that time, we’ve watched the US10YR yields trade up from 1.3% to 1.9% . As a consequence, money managers have sold-off defensive yield names. This has been most evident in ASX 50 names within the infrastructure and property sectors.
We maintain a positive interest in these names as the current share prices now have many of the yields offering 100 basis points, (or 1%), more than they were trading at 2 months ago.
WFD and GMG are now trading back on 4% yield, whereas TCL, SYD, GPT and SCG are on average trading near 5% yield.
The December FOMC rate decision meeting will likely be the catalyst for a bounce, however, we’re not expecting these names to recapture the recent highs. Therefore, we’ll look to sell the rally into the early part of 2017. The algorithm engine will track these names and I’ll be certain to alert you to the next lower structural high, but for the time being, you may want to position around the short term bounce which could offer up to a 10% rally.
Most property stocks have broken their long term uptrends and are displaying the early signs of a “rollover” type pattern. We’ll most likely see a bounce from the current oversold level, driven from an outcome on the December Fed rate hike. However, the probability of a bearish lower high in the next 3 to 6 months will mean the counter trend trade from the current lows will be short and explosive but the real opportunity to watch will be the short side trade in 2017.
The above picture applies to most property trusts and property development companies. The exception appears to be SGP and LLC. Out of the two names, my preference remains Lend lease.
FY17 should deliver EBITDA of $1.2b, EPS of $1.30 and DPS of $0.68 placing the stock on a forward yield of 4.9%
On the 2nd of September, we made a blog post highlighting a group of stocks to place on your watch list. Among these were a number of property trusts and their indicated buy zones. Since then, as anticipated, we’ve seen bond yields move higher and selling in defensive yield names continue. We’re now at a point where a number of the names on our preferred watch list are in the “go zone”.
This post revisits the property trust names, however, there’re other sectors too that are now showing multiple buy-side signals from our algorithm engines.