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Three Stocks to Buy in Real Estate Sector

October 20, 2015 | Team Kalkine
Three Stocks to Buy in Real Estate Sector

Peet Limited



Diversified land bank with solid projects pipeline: Peet Limited (ASX: PPC) reported a revenue increase of 22% year on year (yoy) to $360.9 million in fiscal year of 2015 boosted by its development business wherein the group settled over 3,266 lots. The group bought over seven new projects during the period with >4,000 lots/dwellings with GDV of around $1 billion, while average acquisition price per lot was over $30,000. The group sold Greenvale for $93.1 million in August 2015. PPC has contracts of 2,061 lots worth of $441 million. The group settled over 140 apartments during FY15, and is developing more 340 apartments which are under either construction or in design phase. Meanwhile, PPC has a pipeline of about 1,700 units/apartments across its national portfolio. Peet improved its EBITDA by 25% yoy to $92.4 million, while enhanced its EBITDA margin to 26% in FY15.  
 
 
Peet Business Model (Source: Company Reports)
 
Stock Performance: The shares of Peet fell over 9.91% in the last six months on investors’ concerns of its performance given the volatile market conditions. On the other hand, Peet is well positioned for growth with a solid pipeline of around 47,000 lots spread across the world. The group delivered sales better than its forecast and also receiving applications from new investors especially from east coast, boosting its retail investor base. Peet also improved its return on capital employed to 13.8% in FY15 from 11.0% in prior corresponding period (pcp). We believe that the group is trading at attractive valuations, with a relatively cheaper P/E of 12.6x and a decent annual dividend yield of 4.31%. Based on the foregoing, we give a “BUY” recommendation at the current price of $1.045.
 
 
PPC Daily Chart (Source: Thomson Reuters)
 

Arena REIT No 1



Enhancing business platform: Arena REIT No 1 (ASX: ARF) reported a 37% yoy increase in its Statutory Profit to $61 million during fiscal year of 2015, while the operating profit rose 19% yoy to $22 million during the period. Arena REIT annual Management expense ratio decreased by 31 basis points which showed the group’s efforts of six months of savings by the group in net management costs post internalization. The group’s gearing fell from 33% to 29% in FY15 and has an undrawn debt capacity of $44 million to fund its further developments and new acquisitions. Meanwhile, Arena delivered a 3.4% yoy increase in its overall like-for-like annual rent growth, with medical centers and childcare centers like-for-like rent improving by 2.7% and 3.5% respectively. The group maintained its occupancy at 99%, while number of properties rose to 197 as of June 30, 2015, against 193 in pcp. Accordingly, portfolio value rose to $420 million in FY15, as compared to $356 million in prior corresponding period.
 
 
Portfolio Composition (Source: Company Reports)
 
Stock Performance: The group’s shares delivered a year to date returns of over 4.49% (as of October 20, 2015) and rose over 1.87% in the last four weeks. Arena improved its NAV by 18% yoy to $1.33 in FY15 while its return on equity rose to 22% during the period from 20% in pcp. Arena extended 45 leases enhancing WALE by 0.4 years to 8.9 years. We believe that the stock is trading at a considerable valuation with a very cheap P/E of 5.79x coupled with an outstanding dividend yield of 6.28%. Change in substantial holding by Commonwealth Bank of Australia seem to be an attraction. Accordingly, we give a “BUY” recommendation at the current price of $1.660.
 
 
ARF Daily Chart (Source: Thomson Reuters)
 

Federation Centres Ltd



Merger with Novion Property:  Federation Centres Ltd (ASX: FDC) and Novion Property Group merged in June 2015, which is accounted as a reverse acquisition. With the merger, the group now has greater than $22.6 billion of retail assets under management which includes $14.3 billion worth of direct portfolio. Moreover, the merger boosted the firm’s scale to 99 retail assets, wherein direct interests were 88 centers which were either fully or jointly owned, including over 9,700 leases which generate over $18.6 billion in annual retail sales. With regards to the results updates, the statutory results of the Group has 12 months of Novion and one month of Federation Centers. The merged entity underlying earnings rose by 6.2% yoy to $683.1 million, in line with the guidance provided. Meanwhile, the group already achieved over 60% of the targeted operational cost synergies in integration and recorded over $28 million of annualized interest cost savings at a weighted average cost of debt of 4.2%. Meanwhile, FDC has priced over $433 million US Private Placement Notes (wherein funding would be provided by this yearend) and the proceeds would be used to repay the group’s unsecured debt. The unsecured USPP Notes were priced at a weighted average margin of about 170bps at par with US Treasuries and has tranches which include US$184 million with a term of 10 years maturing on December 2025; US$66 million with a term of 15 years maturing on December 2030; and A$75 million with a term of 15 years maturing on December 2030. The Company has also got a new chief investment officer (Mr Michael O’Brien) on board for group strategy in terms of investment management.
 
Stock Performance: FDC shares rose 7.6% in the last four weeks (as of October 20, 2015) and we believe this growth momentum to continue in the stock. Given the above and FDC’s cheaper P/E of 11.07x along with a solid dividend yield of over 5.97%, we give a “BUY” recommendation to the stock at the current price of $2.84.
 
 
FDC Daily Chart (Source: Thomson Reuters)
 
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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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