Australian real estate investment trusts (A-REITs) got crushed in the lead-up to and in the aftermath of the Global Financial Crisis, the S&P/ASX 200 A-REIT Index collapsing by 78.1 percent from its all-time closing high on Feb. 22, 2007, to its crisis-low on March 6, 2009.

Recovery from that low has been driven by portfolio rationalization, cost controls and a trimming of the sails by previously overly ambitions A-REIT executives who now operate much more conservatively.

The A-REIT Index suffered a mini-crash of sorts in 2013, coinciding with the rise in the yield on the 10-year US Treasury note from an all-time low of 1.63 percent on May 2, 2013, to 3.03 percent by Dec. 31, 2013.

REITs around the world benefitted from the rotation of traditional bond investors out of risk-free assets into higher-yielding vehicles during a period of historically low interest rates. The first real indication that this era could end caused an exodus from even these vehicles that are perceived to be among the safest yield plays among equity groups.

But rates have stabilized. In fact the yield on the 10-year US Treasury note, the global benchmark for the risk-free rate of return, hit a new 2014 low this week. And REITs have enjoyed new favor this year.

Our position is that, based on the fact that interest rates rode a decades-long downtrend into an historically low range, it’s likely that there’s only room to go up from here in a long term context.

But the timing and magnitude of the increase are still open questions. And after the rise rates will likely settle in a range below what we’re accustomed to in terms of historical norms.

We seem to be stuck in a low-growth environment. And that augurs continued subdued inflation.

Indeed, the results of the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for the first quarter indicates that though expectations for US gross domestic product (GDP) growth have risen, economists now forecast that inflation, as measured by the US Federal Reserve’s preferred personal consumption expenditure deflator, will be even more subdued over the next couple years.

The Fed voted unanimously on April 30 to reduce its bond-buying stimulus program for the fourth straight meeting, to USD45 billion a month from USD55 billion.

At the height of its “quantitative easing” program, the Fed was buying USD85 billion a month in Treasuries and mortgage-backed securities.

Though the central bank thinks the economy is strong enough to do without QE and is on track to end the bond-buying program by late 2014, its benchmark rate remains at the zero bound and will likely stay there for the foreseeable future.

Slower growth relative to historical norms also suggests that when the Fed does get around to raising its benchmark fed funds rate increases will be slow and not as aggressive compared to past tightening cycles.

And, combined with broader pressures, including a drop in investment demand in the advanced economies, an excess of savings in the emerging economies and a portfolio shift towards bonds and away from equities, investors in search of yield will continue to look for relatively safe equity instruments such as REITs.

The “savings glut” in emerging economies will unwind some, investment in developed economies may increase some, and QE will end.  But the International Monetary Fund projects the global real interest will rise from 0.5 percent now to only 0.5 percent to 2 percent by 2018.

Even at the high end of this band, the global real interest rate will remain well below the growth rate of global real GDP throughout the medium-term horizon.

April saw the completion of one deal involving A-REITs under How They Rate coverage and a bid from another for one that we hold in the AE Portfolio.

There is some speculation that these are the first signs of a new series of merger and acquisitions in the sector. Setting aside such excitement, A-REITs, in the aftermath of a steep slide during the Global Financial Crisis, still offer compelling value and reliable income.

Here’s a look at the eight A-REITs currently under How They Rate coverage.

Portfolio Exposure

As we noted in last month’s Portfolio Update, AE Portfolio Conservative Holding Australand Property Group (ASX: ALZ, OTC: AUAOF) has surged to five-and-a-half-year highs following the acquisition by fellow A-REIT Stockland (ASX: SGP, OTC: STKAF) of a 19.9 percent stake in Australand at an average price of AUD3.78 per unit.

Stockland had hired investment bankers from Citi, UBS and Bank of America Merrill Lynch to advise it on a possible bid for all of Australand. On April 22 Stockland leveled a bid that values Australand and AUD4.20 per share, which was rejected by Australand management.

Stockland has said it won’t boost its bid without having access to Australand’s books for due diligence review, which Australand has thus far refused to grant.

The move is widely viewed as the next step in a new round of merger and takeover activity in the real estate investment trust sector. On April 23 Dexus Property Group (ASX: DXS, OTC: DXSPF), along with partner Canada Pension Plan Investment Board, completed the takeover of Commonwealth Property Office Fund.

If no deal can be reached, Stockland is prepared to walk away, sell its 19.9 percent Australand stake and reap a potential AUD60 million profit.

Stockland is interested in Australand’s industrial development pipeline and its investment portfolio. Australand would also give Stockland the opportunity to reinvigorate its apartments business. Australand’s expertise in developing medium-density residential projects is another factor in the decision-making process.

To acquire 100 percent of Australand Stockland will need to raise its offer or kick in a cash component, though it may be difficult to raise its bid and maintain deal terms that will boost enterprise value.

Including a cash payment would involve asset sales, though non-core assets with value of more than AUD400 million could prove ripe for the selling.

Analysts have estimated earnings per share accretion of 5 percent should Stockland gain full control of Australand.

Stockland’s fiscal 2014 third-quarter market update revealed the strongest residential deposits for the year to date as of March 31, 2014, in four years. Management noted the A-REIT is “well placed” to reach 6 percent earnings per share growth for the full year, at the top end of its guidance range.

Stockland, with the highest yield among A-REITs in the AE How They Rate coverage universe at 6.3 percent, is a buy under USD3.75.

Australand, meanwhile, is on track to pay distributions totaling AUD0.255 per share in fiscal 2014, a 19 percent year-over-year increase.

Management recently reiterated its target of 17 percent to 20 percent growth in operating earnings per security in 2014, supported by a high-quality portfolio, underlying projects and the current strong conditions in key residential markets.

Earnings will be skewed to the second half of the year due to the timing of settlements on its residential projects and the delivery of in-progress industrial projects.

Australand Property Group is effectively a hold at these levels pending resolution of its dealings with Stockland.

Doing Deals

GPT Group (ASX: GPT, OTC: GPTGF), which has been a bit of an underperformer since we added it to the Conservative Holdings in the May 2013 issue, is the top-performing How They Rate A-REIT in 2014.

From Dec. 31, 2013, through May 13, 2014, GPT generated total return (capital gain or loss plus distributions paid) in US dollar terms of 18.4 percent.

The share price did back up a bit this week after reports that Singaporean sovereign wealth fund GIC sold its 8 percent stake in the A-REIT at AUD3.81 per.

Retail sales continue to build momentum, with GPT’s specialty sales up 5.9 percent in March 2014 versus March 2013 and 4.4 percent for the first quarter versus the first quarter of 2013.

GPT’s wholesale funds are working on planned acquisitions of AUD1.2 billion of assets, including AUD679 million of properties from Dexus Property Group (ASX: DXS, OTC: DXSPF) and Canada Pension Plan Investment Board.

In March the GPT Wholesale Shopping Centre Fund agreed to buy CPPIB’s 50 percent ownership of Northland Shopping Centre for AUD496 million.

GPT Wholesale Office Fund expects the properties at 750 Collins and 655 Collins to settle by the end of May. The properties at 2 Southbank Boulevard and 10 Shelley are subject to expiration of pre-emptive right periods with Australand and Brookfield Australia Property Trust, respectively.

Along with Dexus, GPT is emerging one of two dominant owners of Australia’s national office market. Dexus now owns outright or has interests in such properties as 5 Martin Place and Grosvenor Tower in Sydney and 360 Collins Street and 385 Bourke Street in Melbourne.

The change in ownership comes amid a reduction in sublease availability across central business district office markets. Sublease availability is the office market barometer of business confidence. The reduction over the first quarter is the first sign that corporate Australia is moving from a consolidation to a growth mode.

GPT’s first-quarter office occupancy increased by 50 basis points to 91.1 percent.

GPT offered a conservative outlook for fiscal 2014 earnings per share along with its fiscal 2013 results announcement, noting that it was aiming to meet the initial 3 percent it established in October 2013, without including the benefit of a subsequent share buyback plan.

GPT’s primary focus, however, is clearly focused on substantial assets-under-management growth via its wholesale fund platform. GPT Group, which is yielding 5.4 percent, is a buy under USD4.

Dexus, along with partner Canada Pension Plan Investment Board, completed the takeover of Commonwealth Property Office Fund in April, boosting funds under management to AUD17.6 billion, including an AUD11.7 billion office portfolio.

Management raised its fiscal 2014 funds from operations (FFO) per unit forecast to AUD0.0834 and its distribution guidance to AUD0.0626 per share based on the acquisition.

Dexus’ office occupancy increased by 30 basis points year over year to 94.9 percent as of March 31, 2014. Dexus Property Group is now a buy under USD1.10.

Westfield Group (ASX: WDC, OTC: WEFIF) reported a 2.8 percent increase in first-quarter Australian retail sales to AUD20.3 billion, buoyed by solid results in the “specialty” category, as a trend in place since the third quarter of 2013 endured.

US specialty retail sales grew 3.1 percent to USD585 per square foot. New Zealand comparable specialty retail sales rose 3.6 percent.

The A-REIT’s Australian-New Zealand portfolio remains at almost full occupancy, with over 99.5 percent leased.

Average specialty rent for the Australian portfolio grew to AUD1,536 per square meter, up 1.6 percent from March 31, 2013. Average specialty rent in New Zealand was NZD1,132, up 0.5 percent year over year.

Leasing demand in the US portfolio remains solid at 92.8 percent occupancy, in line with last year. Average specialty rent was USD75.35 per square foot, up 3 percent year over year.

UK specialty retail sales were up 1.6 percent to GBP828 per square foot. The UK portfolio is currently 99 percent leased. Average specialty rent for the portfolio grew by 5.1 percent from March 2013 to GBP88.69 per square foot.

Westfield Retail Trust (ASX: WRT, OTC: WTSRF) reported comparable specialty sales growth of 4.3 percent in Australia and 3.6 percent in New Zealand for the three months ended March 31, 2014.

Average specialty rental growth was 1.4 percent, including growth of 1.6 percent in Australia and 0.5 percent in New Zealand. The A-REIT’s shopping center are more than 99.5 percent leased

Westfield Group has improved the terms of its plan to split its 47 Australian and New Zealand shopping centers from its international operations and merge them with Westfield Retail Trust, which is a joint owner of the Australian assets.

The new, merged entity will be known as Scentre Group. Changes to the proposal include a reduction in net debt for Scentre of AUD300 million.

Westfield Group’s 47 Australian and New Zealand shopping centers will be dropped into

Shareholders are due to vote on the split on May 29.

Westfield Retail Trust guided to 2014 funds from operations per share of AUD0.204, representing 2.8 percent growth from 2013.

Management plans to distribute 100 percent of FFO, or AUD0.204 per share.

The 2014 forecast assumes comparable net operating income growth of 2 percent to 2.5 percent for Australia and no material change in the current operating environment. It excludes the impact of the revised merger proposal or any future capital transactions.

Under the revised proposal the 2014 pro forma forecast FFO for Scentre Group is AUD0.2175 per share, which represents an increase of 6.6 percent on the Trust’s 2014 forecast FFO.

Westfield Group, which is yielding 4.7 percent, is a buy under USD10.50. Its affiliate Westfield Retail Trust, which is yielding 6.2 percent, is a buy under USD3.40.

Remainder REITs

Goodman Group (ASX: GMG, OTC: GMGSF) has operations throughout Australia, New Zealand, Asia, Europe, the UK, North America and Brazil. It’s the largest industrial property group listed on the Australian Securities Exchange and one of the largest listed specialist fund managers of industrial property and business space in the world.

Goodman’s logistics portfolio property is benefitting from the rapid growth of online retailing.

The A-REIT’s capital partners are increasing investments in Goodman’s funds to build out its AUD10 billion-plus development pipeline. It has AUD5 billion of undrawn but committed capital as of March 31, 2014, to fund growth.

Development work in progress was AUD2.7 billion, up 2.6 percent from Dec. 31, 2013, and 21 percent versus the prior corresponding period. Management maintained a forecast yield on cost of 8.4 percent.

One factor to monitor is development pre-commitment levels, which continue to decline. Now at 65 percent, Goodman is “experiencing greater investor appetite for more speculative-led development” in undersupplied logistics markets in China, Japan and North America.

The A-REIT and its capital partners are, in other words, taking on more risk, though a very healthy 91 percent of current work in progress is either pre-sold or pre-funded.

Goodman is well placed to exceed its earnings per share growth target of 6 percent in fiscal 2014 and beyond, with growth is underpinned by its work in progress and funds under management growth and high-margin Japanese projects in fiscal 2014 and fiscal 2015.

This week the A-REIT’s credit rating was affirmed at BBB by S&P, with its outlook raised to “positive” from “stable.” S&P noted “management’s continued successful and prudent execution” of its growth strategy and the A-REIT’s prospect for improved operating performance, particularly overseas.

S&P also assessed Goodman’s liquidity as “strong,” noting that “the group seeks a high level of pre-commitments before undertaking development spending, and we expect that Goodman will maintain sufficient liquidity to meet its development commitments.”

Goodman Group is a buy under USD4.50.

Mirvac Group (ASX: MGR, OTC: MRVGF) reaffirmed its fiscal 2014 operating EPS guidance range of AUD0.118 to AUD0.12 per share, representing 8.3 percent to 10.1 percent growth compared to fiscal 2013.

Management reported strong occupancy across the Mirvac Property Trust portfolio, with 97.6 percent occupancy and a weighted average lease expiry of 4.7 years. It secured 98.8 percent of expected development earnings before interest and taxation (EBIT) for fiscal 2014 and 59.1 percent for fiscal 2015. .

The office portfolio registered occupancy of 96 percent, with a strong weighted average lease expiry of 4.8 years. Management continued to de-risk active development projects under construction through pre-leasing.

The retail portfolio posted occupancy of 99.3 percent, with annual sales growth of 5.9 percent.

Industrial portfolio occupancy remained high at 99.5 percent, with a low-risk weighted average lease expiry of 8.24 years.

And the residential unit has settled 1,638 lots in the financial year to date, with an upwardly revised target of 2,400 for fiscal 2014.

Mirvac recently reached a deal to sell a 50 percent interest in 275 Kent St., which is fully leased to Westpac Banking Corp (ASX: WBC, NYSE: WBK) and is the A-REIT’s largest asset, to Blackstone Group for AUD435 million, a 1.8 percent premium to book value and an exit yield of 6.65 percent.

The sale de-risks the A-REIT’s overall profile, as the exposure to a single tenant asset was substantial given a 4.5-year remaining lease term.

Blackstone also has a call option to acquire a portfolio of seven non-core assets for AUD391.4 million at a 1.4 percent premium to book value. The call option is exerciseable between Jul 2014 and September 2014.

Mirvac is on track for very strong earnings per share growth in fiscal 2014, approximately 10 percent. The main challenge will be growth in fiscal 2015 fiscal 2016 compared to the current year. But the office portfolio is solid, management has demonstrated its ability to develop properties and earnings growth is underpinned by improving residential returns, particularly in
Sydney

Mirvac Group, which is yielding 5.1 percent, is a buy under USD1.55.