Commercial Property Funds

I have a question, why is it commercial property funds are been slaughtered on the ASX? Am I missing something?

For example, stock code OIF (Orchard http://www.orchardfunds.com/Products/Listed Products/Orchard Industrial Property Fund.aspx ) owns 27 industrial properties around australia. 60% of the tenant base is woolworths, and average lease time is 11 years. Its yield is from rent collected. Not developments etc. So from what I can see, this yield is very stable.

They pay a dividend of 5c PA increasing each year, so by my calculations, this is paying over 20% PA yield on its current price, yet people continue to dump this stock with few buyers in the market.

Is there something I'm missing? Is woolworths likely to default on their property leases?

My understanding is that many CP fund managers are being hit with availability of credit - just like residential property investors - so refinancing loans, or getting new loans for new acquisitions can be a big issue.

Cheers,

The Y-man

I can see that lots of older people near or at retirement would have invested in such stocks for the purpose of yield, and if they put in a couple hundred grand, they are now left with 1/4 of their initial investment.

hi all
my understanding
they are because alot of those funds also were lenders into commercial activities.
and the people that invested in them were doing so because of the higher returns that comm gets.
so on one hand the return was high and the risk was relatively low compared to other forms of entity they were good to get into
with mr rudd and his guarantee
the risk was changed and now people removed the money from the funds and the comm guys are caught in the middle.
the cost of funds is not that major an issue
its the risk on the balance sheets and because the risk has risen against other entities that have a lower risk the cash flows out.
and so they freeze to stop that happening
when this happens people look at the funds and because comm like a gpt is into alot of areas they cause a uneasiness in the market and then the moeny come out and into a lower risk entity
thats what we are seeing
the underlying commodity is the same and for me the comm are a lower risk but this is percieved risk.
and thats what markets run on.
hense I don't like shooting from the hip as it cause other movements like a ripple that cause big problems.
add to that alot of the comm are holding alot of different types of comm and some of those have come off and there is alot in the market trying to find a home, this again under mind confidence and drops value

crc_error said:

I have a question, why is it commercial property funds are been slaughtered on the ASX? Am I missing something?

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Most LPTs have plummeted for one or more of a few reasons -

• the credit crisis means they are unable to refinance short term loans (a la Centro). Residential IP doesn't have that problem because loans have 25 yr terms.
• slowing economy, leading to higher unemployment, leading to lower need for office space & higher vacancies.
• slowing economy, leading to less spending, leading to more retail businesses going broke.
• falling asset values, so loan covenants may be breached - can lead to various other bad scenarios (see below). This is v. similar to a margin call on shares.
• falling earnings distributions means they're worth less.
• A$ has fallen 30% meaning that some LPTs with O/S loans suddenly as in danger of breaching loan covenants.
• Some LPTs that also do developments are suddenly finding no buyers for their products. And some projects/joint ventures are going broke (eg Valad has fallen 95%+ in the last 6 months as a couple of JVs have gone broke & it's likely more will follow).
• Some LPTs also manage funds for eg Pension Cpys. Some of these funds are suffering massive withdrawals as a result of the Govt guarantee on bank deposits. Some have frozen withdrawals (not a good look), some are being forced to consider selling assets.
• breaching loan covenants is serious. It can give the bankers control of all your assets. To avoid breaching loan covenants, there are a few options -
  • issue more shares usually at a huge discount (eg GPT just raised $1B @ a 48% discount to an already v. low price) - this means more diluted distributions
  • persuade your bankers to remove or raise covenant ratios -tricky in the current environment, but possible if you pay a higher IR (a couple have done this)
  • sell some assets & pay down debt - problem is that no-one is buying because they know that there will be fire sales within 12 months & they'll be buying from the liquidators real cheap. Virtually all of them are trying this.
• margin loan LVRs are being reduced (some to 0% from 70%!), so there is some forced selling.
• they've mostly stopped paying distributions from capital gains & development gains, now they only pay distributions from rental income, so their yield is lower.
• downgrades by ratings agencies means some funds can no longer hold them
• there must be others.....

All the LPTs with high (>40%) gearing or had development arms fell ~50% or more quickly, and most have fallen a further ~50% as conditions have deteriorated. The less risky ones (with little debt, no development or funds mgmnt & high quality tenants & loans) have more recently been dragged down too. Westfield, probably the premier LPT, has fallen from $23 in Feb to $14 today.

Investing in any LPT ATM carries significantly higher business risk than usual.

crc_error said:

For example, stock code OIF (Orchard http://www.orchardfunds.com/Products/Listed Products/Orchard Industrial Property Fund.aspx ) owns 27 industrial properties around australia. 60% of the tenant base is woolworths, and average lease time is 11 years. Its yield is from rent collected. Not developments etc. So from what I can see, this yield is very stable.

They pay a dividend of 5c PA increasing each year, so by my calculations, this is paying over 20% PA yield on its current price, yet people continue to dump this stock with few buyers in the market.

Is there something I'm missing? Is woolworths likely to default on their property leases?

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Their gearing was 60%+ when I last checked. The market thinks that this is high risk and is pricing it accordingly. There are plenty of $1B+ LPTs that are expected to yield similar with arguably lower risk.

Thanks Keith, what about IIF? it has a 40% gearing, and yield is 50% PA.. its price has been slaughted even more!

crc_error said:

Thanks Keith, what about IIF? it has a 40% gearing, and yield is 50% PA.. its price has been slaughted even more!

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There were a few others whose yield was 50% for a short while... sounded too good to be true.... and then the yield suddenly went to 0% .

IIF big on development ($5B+ work in hand), if has ~50% of it's assets O/S (N.America & Europe). And it's 'currently reviewing it's capital management strategies'... which is management speak for 'we might have to dilute existing shareholders significantly or something equally bad (see my post above)'. Recently look-though gearing was >51%, they get a margin call at 55% - adverse A$ movements (although mostly hedged) & falling capital values will push them over this limit & possibly into oblivion.

Cheers

Keith

I notice back in september you were buying LPT's, are you still buying them? which ones are you looking at? Do you still have other stocks like banks etc?

You seem very negative on LPT's at present, or at least highlighting some very real risks in them!

crc_error said:

I notice back in september you were buying LPT's, are you still buying them? which ones are you looking at? Do you still have other stocks like banks etc?

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My medium term view is low growth in all asset classes (IP,shares,LPTs). I've become more active and am doing some trading. I still hold banks, LPTs & others, and also cash. Earnings are still looking good compared to prices. I want to be in a position to take advantage of the current long term bargains when the current risks reduce.

crc_error said:

You seem very negative on LPT's at present, or at least highlighting some very real risks in them!

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The market is negative because of the risks outlined above. They are real risks & IMO it will take a long time for the market to rerate them. Once the risks reduce, I'll be happy to wade in and be subjected to low growth for years and (possible) 20% dividends.

GMG & GPT have both just reduced some of their risks significantly by raising $1B+ & diluting their existing shareholders... I'm sure others will follow. However, based on it's current price GMG has promised to 20%+ next FY... and it's share price hasn't increased... the market must feel there's still to much risk.

It's also possible that LPTs will yield 15-20% for the foreseeable future, with little growth, just like they did in the old days.

I wish Centro would pay a 10% dividend

Hi Keith

Excellent post - kudos. I agree things are looking bad at the moment - hopefully that will translate into some good direct comm / ind buying opportunities next year some time.

By the way, I would appreciate your thoughts on CNP. They were one of the first to crash but their banks still haven't taken over. They have had a lot of stock on the market - not sure how much they have sold yet but there is still a lot for sale. I know a lot of people are looking at this stock in close detail but a few thoughts occur to me, as follows:
- The banks would know any property sales are only likely to occur at low prices. Of course try it on anyway while the banks still give you the option.
- So if the banks expected they weren't going to get their interest back from ongoing operations, they would have already moved in with the liquidators. Why wait unless they thought there was a good possibility for the company to meet its obligations? Their credit depts would be crawling all over it to determine this.
- The GCF has yet to hit the average retail store in their shopping centres although it is probably hitting them now and their owners share portfolio would have been hammered!
- Annual rent rises, coupled with falling IRs will only give them more breathing space from herein. If the banks don't pass on the margin it at least gives the bank more breathing space because they won't want to foreclose either.
- Of course if the liquidators moved in it wouldn't look good and would impact the value of other assets the banks hold as security elsewhere - they would be keen to avoid this.

So from the point of view of someone who doesn't yet look at these beasts every day CNP looks good value at the moment on the basis there may be a 25% chance it scrapes through. Am I missing something obvious?

HiEquity said:

By the way, I would appreciate your thoughts on CNP.

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I think Centro is priced for oblivion. The last I read was this piece in SMH

A couple of snippets...

In the case of Centro, the banks keep rolling their debt and the secured component of that debt has become materially higher....

Anybody unfortunate enough to still own shares in the "Bad Boys'', or foolhardy enough to have waded in for a spot of bargain-hunting, should be under no illusion - the prospects for the survival of your equity are remote.

Under company law, a charge that has been taken over a company's assets can be rendered void if the company goes bust within six months of that charge being taken. In the case of some credit meltdown victims, we are approaching that six-month threshold now......

Once the banks have taken their charges and seen out that six month period, shareholders can kiss their chance of a return goodbye.

Shareholders must be aware of this and should put pressure on so-called independent directors to protect their rights. If independent directors deem the banks are merely perfecting their security and the company has little hope of surviving in the longer term, they should appoint a voluntary administrator.

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CNP is more speculative than 90% of small cap miners IMO.

keithj said:

I think Centro is priced for oblivion. .

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Fair enough...

Thanks!

hello,

great info keithJ,

sector may "hot" up as dividend season kicks into gear around mid december I think, so maybe month out things may move

this one a tricky one, do you take shares (DRP) or cash dividend?

thanks
myla

myla said:

sector may "hot" up as dividend season kicks into gear around mid december I think, so maybe month out things may move

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The dividends are of far lower significance than capital preservation ATM.

eg GPT will be going ex-div 4.2c tomorrow, but it's shares fell 6c today.

And since I posted above I read that Dexus (one of the higher quality LPTs) has announced

ONLY two months after providing guidance, Australia's largest office trust, Dexus Group, has followed the rash of trusts cutting distributions.

Investors will now receive 8.2c per security for the 2009 financial year instead of the forecast 12.1c.

"I know this will be disappointing for some investors," Dexus chief executive officer Victor Hoog Antink said at the trust's annual general meeting in Sydney yesterday.

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That's around a 30% reduction.

myla said:

this one a tricky one, do you take shares (DRP) or cash dividend?

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Cash for me, especially in these volatile times.

hello,

thanks keithJ, yes capital is very very important,

i sold out at open of CFX on tuesday i thnk it was, got lucky with a spike at open to 2.10 then bombed the rest of day, cfx hasnt been "as" caught up in the credit crunch so got capital out

I will probably now take cash as well, but curious if you do get shares at such low rates then if "normality returns" the increase on dividend shares would be great

thanks
myla

I agree with keithj - definitely the cash.

Better in your pocket than the LPT's, particularly as the future of some of them is questionable. The fact that their banks/financiers are reluctant to show support would make me very reluctant to give them more of my money (dividends), IMHO.

Cheers
LynnH

I'm steering clear of the small one's like OIF for the moment for all the reasons pointed out above. The warehouse they own at the airport may be fine, but if their bank won't play ball then......

I am however wading into the market in a small way into the more secure plays. Granted there is always risk, but it is less. Yes there may be more downside in price, but I'm planning to buy in over a few months so would be happy with some more price decreases. I'm also buying purely for dividend income, not cap growth.

I'm sticking with the big guys who look relatively safe. I've picked up WDC at 7.5% yield and am hoping the price will drop further. Whilst they are open to a decline in consumer spending, I still like their diversification ie. multiple countries, multiple tenants, multiple income streams (fixed rental, % of store takings, development profits etc) and consider them to be a safe income play at these prices even if there is a bit of cap slide for a while.

Also looking at LLC which again whilst focused on the property industry, is still quite diversified in geography and method of income (ie. communities, construction, retail etc.). Dividend yield is currently sitting at around 10% which I expect to come down somewhat with lower profits, but again I'm thinking long term. Even short term the dividend can slide 35% and it's still above my cost of funds (if I do end up leveraging into it).

hi keithj
any chance of the ones you think will drop off the perch using your crystal ball.
I am very interested in this
my crystal ball says that we will have a bit of a flood in jan feb next year its yours telling you any different

grossreal said:

any chance of the ones you think will drop off the perch using your crystal ball.

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The market thinks Valad and Centro amd Allco are looking likely to be taken over or liquidated or the keys handed to the banks. I wouldn't be surprised if OIFs yield (briefly) increased dramatically either.

My feeling is that most of the larger ones will survive with reduced distributions per share and no growth for the next 2-3 yrs, and a smaller asset base.

grossreal said:

I am very interested in this my crystal ball says that we will have a bit of a flood in jan feb next year its yours telling you any different

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An acquaintance who is involved in financing stuff like that tells me that within 2-3 months there will be a lot more commercial property at fire-sale prices.

At present there is a glut of comm prop on the market, but v. few buyers, with more to come. I'd guess forced sellers will have to discount to ~50% of their book value to move them.