Out Of The Woods? Not Just Yet…

Originally published by UBS

While US stocks rise to record levels thanks to The Don's "phenomenal" tax cuts, French and Italian bonds gained amidst political risk. Many discount Le Pen's chances in France but those same commentators discounted Trump's chances and Brexit. At home, there have been signs of strain with weaker earnings reported across a number of sectors and we've just seen specialty retailers Rhodes and Beckett, Herringbone, David Lawrence and Marcs enter Voluntary Administration. It's part of the reason why we don’t think we're out of the woods just yet and that defensives still have a role to play.

Macquarie Equities have assessed the impact of those retail closures on the two largest Australian landlords being Vicinity Centres Re Ltd (AX:VCX) and Scentre (AX:SCG) as ~0.3% of their portfolio's area. While not ideal, this is part and parcel of dealing with retailers and allows for remixing, with their bank guarantee's (usually 3–6 months) providing security. Dick Smith was a larger impact last year and was dealt with successfully.

We've seen some parties look to take advantage of the very strong demand for real estate assets with The Australian suggesting that Blackstone (NYSE:BX) Mortgage Trust Inc (NYSE:BXMT) is weighing up options for its ~$4bn retail portfolio after receiving unsolicited offers on the portfolio of 11 centres. Elsewhere "The Duke", not John Wayne but rather the 7th Duke of Westminster, is looking to offload some Sydney assets via interests in 320 Pitt Street with Goldman Sachs (NYSE:GS) and locally listed group Propertylink Group Pty Ltd (AX:PLG). 320 Pitt St was reportedly purchased for $200m and could sell for up to $280m. Not that The Duke needs the cash, with the 26 year old having inherited 53,863 hectares of the British Isles, including properties in London's Mayfair and Belgravia. On the purchasing side there remains an abundance of capital, largely led by offshore investors looking for a safe haven address.

In terms of results this week, the following groups reported:

Shopping Centres Australia (SCP)

Shopping Centres Australasia Group (AX:SCP) upgraded EPS guidance for FY17 to 14.6cps driven by solid leasing activity and a lower debt cost. Supermarket MAT growth in 1H17 improved slightly with December 2016 said to be +2.4% on December 2015, showing the recent improvement by Woolworths Ltd (AX:WOW). Net tangible assets (NTA) rose +10.4% via Directors valuations to $2.12 and the portfolio's cap rate compressed to 6.62% from 7.13%. Most questions concerned their small stake in Charter Hall Retail Reit (AX:CQR), which at the time of purchase enabled SCP to redeploy sales proceeds. Macquarie Equities estimate a deal between the two could be ~7% accretive to EPS.

Bunnings Warehouse Property Trust (BWP)

BWP Trust (AX:BWP) has reaffirmed FY17 guidance of ~3% distribution growth with most questions about the tenants (Bunnings) intentions to leave certain centres. Clearly valuers also have some concerns with the cap rate's expanding across 17 of their 80 properties, however the portfolio is valued at a 6.77% which doesn’t look stretched in today's market. Gearing at 21% is one of the lowest in the sector.

Centuria Metropolitan REIT (CMA)

Full year EPS guidance is unchanged at 18.7–19.0¢, with a forecast FY17 DPS at 17.5¢ which implies a very attractive ~7.8% yield. NTA rose +4.7% since June 16 to $2.32. Portfolio occupancy improved to 98.9% with a weighted average lease expiry (WALE) of 4.2 years. Shaw and Partners highlighted that ~94% of Centuria Metropolitan Reit's (AX:CMA) rental revenue is subject to fixed average annual reviews that average 3.7% pa, driving future EPS growth.