Year in review: Centro and Charter Hall dominate year of consolidation for A-REITS

Two sagas – Centro and Charter Hall Office REIT - grabbed the headlines in Australia’s listed property trust sector in 2011, during a year marked by consolidation, risk aversion and reduced volatility.

Thirty out of 40 A-REITs recorded a positive total return for the 2010-11 financial year, with the volatility of the S&P/ASX 200 Property Index lower than the All Ordinaries at June 30, 2011, according to research by accountants BDO.

The total return (capital and dividends) for the Property Index for the 12 months to June 30, 2011 was 5.8%, compared with an equivalent return for the S&P/ASX 200 All Ordinaries Index of 9.3% with BDO describing 2011 as a year of “modest recover” with the sector having some ground to make up on other equity indices since the GFC.

There was an average 0.6% increase in property values across the sector and while A-REITs continue to trade at significant discounts to their net tangible assets of 23%, this has decreased from a discount of 37% in 2010 and 55% in 2009.

According to Sebastian Stevens, national leader of BDO Corporate Finance, the overall A-REIT sector is in a much stronger position than at any time in the last four years.

“The hard work done in 2009 and 2010 to get balance sheets in order has clearly paid off for the major players, with their look-through gearing levels significantly reducing from around 40% in June 2008 to approximately 30% currently,” Stevens says.

“2011 also saw the continuation of divestment strategies for offshore assets in favour of less risky Australian-based assets. Larger REITs are now well positioned to withstand any near-term pressures that may be experienced by the property sector.”

Arguably the most notable story of the year was the tricky but ultimately successful restructure of shopping centre owner Centro Group, its sister trust Centro Retail Trust, and the group's unlisted funds and syndicates, into a single listed retail trust, Centro Retail Australia.

Trading in the new A-REIT kicked off on December 5 with the share price closing at $1.74, valuing the company at $2.3 billion, up from a listing price of $1.70. The share price has since fallen back to just below its listing price following news that the US hedge funds that own 70% of the trust plan to sell their stakes within 18 months to three years. 

Before the listing, Centro fought hard to win approval from creditors, shareholders and former auditor PricewaterhouseCoopers, which argued all the way to the NSW Supreme Court that the restructure should not proceed. 

The new entity comprises 99 shopping centres, with Woolworths and K-Mart the biggest tenants.

The second biggest A-REIT story of the year – and one that has not yet run its course – is the future ownership and direction of the Charter Hall Office REIT.

At the end of July a bid by a trio of US hedge funds to instigate a management takeover of the trust and ultimately liquidate its Australian assets was soundly defeated, with Mark Wist, senior asset consultant at Atchison Consultants, describing the vote as a “barometer for sentiment in the A-REIT space” indicating little appetite for change.

Little appetite for change perhaps, but there has been investor appetite aplenty since the failed takeover. with a Macquarie Group-led consortium making a $2.39 per share offer for the business on August 29.

On October 5 the consortium upped its offer to $2.43 a share and two months later sweetened the deal with a $2.49 per share offer.

Charter Hall Office REIT management is backing the proposal, with a shareholder meeting pencilled in for March 2012 to decide whether to accept it or not.

The consortium is made up of the Government of Singapore Investment Corporation, Canada’s Public Sector Pension Investment Board as well as the trust’s head stock Charter Hall, indicating the appeal of Australian commercial property assets to offshore sovereign funds.

In its 2011 A-REIT Survey, accountants BDO ranked the Charter Hall Office REIT its top performer of the year managing a total unit-holder return of 43% the highest return of any of the S&P/ASX 200 Property Index members. 

“Consistent with the strong performance exhibited by the office subsector through the year, the A-REIT delivered increased earnings, higher distributions, lower debt and strong portfolio management metrics,” noted BDO. 

“Units in CQO also demonstrated a high level of liquidity, with CQO being one of the most actively traded REITs on the ASX during the 2011 financial year.” 

Among the key achievements noted by BDO include Charter Hall Office REIT increasing in statutory earnings to $69.2 million, up from a loss of $91 million in 2010 financial year, reducing look-through gearing from 45% to 43% and repaying, refinancing or removed all debt due to mature prior to the 2014 financial year. 

The diversified GPT Group ranked second with the Investa Office Fund third. 

S&P/ASX 200 Property Accumulation Index share price performance over 2011

In his analysis of the sector, Stevens says managers at the larger funds have been able to turn their attention to executing against their core strategies and portfolio management. 

"While the larger A-REITs have substantially de-risked their balance sheets, smaller A-REITs continue to possess weaker balance sheets and trade at a much greater discount to NTA.

"This represents the emergence of a two-tier industry.

“Not surprisingly, transaction activity picked up during the year with larger players and offshore pension funds acquiring a number of smaller trusts, and this can be expected to continue," he says.

"The larger funds have built strong foundations for the future both in terms of growth platforms and the ability to withstand any future shocks while the smaller funds are still struggling with heavily geared balance sheets and are finding access to both equity and debt difficult," Stevens says.