Why the discount to net tangible asset in A-REITs should disappear

Mark WistDecember 8, 2020

Net tangible asset (NTA) represents the value of the underlying property assets in an A-REIT and is expressed as a dollar amount per security. A price discount to NTA implies that the security can be purchased on the exchange for less than the value of the underlying real estate held by the A-REIT. 

At its peak in March 2007, the sector recorded an average premium to NTA of more than 80%. In May 2009, that average had fallen to a 33% discount. This fall was caused in part by high gearing exacerbating falling property values as a consequence of the GFC, the short supply of credit facilities to refinance expiring debt, a reduction in the valuation of management entities, questions about the effectiveness and appropriateness of strategies implemented by management in the years leading up to the GFC and concerns about the sustainability of asset valuations on balance sheets. 

The average discount to NTA for the sector is now -11%. 

Gearing in the sector is now a more manageable 30% and credit availability is improving, as demonstrated by the $1.27 billion bi-lateral bank facility recently secured by Westfield Retail Trust. Occupancy rates have improved and rental growth has some positive momentum. The 2011 half-year reporting season confirmed that asset values for quality properties are no longer falling with some beginning to rise. Recent A-REIT asset sales at or at a premium to book value suggest that balance sheet valuations are reasonable. Recent examples include the sale of Stockland’s 50% interest in 52 Martin Place, Sydney at a 2.7% premium to book value and the sale of 259 George Street, Sydney by Commonwealth Office Property Trust at a 15% premium. 

Strategies are now largely focused on domestic activity and development losses have worked their way out of the system.  The management structures of some A-REITs including GPT, Centro and Westfield have undergone substantial change in the past two years and aside from investor rebuke over the Dexus remuneration report, this A-REIT AGM season has so far been relatively uneventful. 

The gap between NTA and security prices may well now start to close as a consequence of increased investment into the A-REIT sector taking advantage of the prevailing NTA discount. This inward investment, including the buy-back activities of groups such as GPT, Stockland and Commonwealth Office Fund should drive prices up over time to meet NTAs.

Mark Wist is senior asset consultant at Atchison Consultants.

 

 

 


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