Wednesday, November 28th, 2018
With the tide receding on global markets, investment selection based on company-specific fundamentals is increasingly important. Individual secular opportunities can be found in cyclical sectors. Although real estate is now enduring the impact of rising interest rates, there remains much to like about specialist commercial property manager APN Property Group (ASX:APD).
APD’s AGM update last week was generally positive, with fiscal year 2019 guidance (which is typically conservative) maintained at 2.40 – 2.90 cents per share. A special resolution was also passed to allow the company to become part of a stapled structure, which is a trust contractually linked with the company, with stapled units traded on the ASX as single securities.
Because trust distributions are made before corporate tax, the shift to a stapled structure will effectively lift APD’s headline yield by 22% to 6.5 per cent. The stapled structure also allows APD to be compared on a like-for-like basis with other listed property fund managers and therefore could drive higher investor interest in APD securities.
We believe APD is a very well-run specialist real estate manager, having solidly outperformed broader and market indices over long periods. With a focus on income-based investment performance, the company has shown a highly disciplined approach to new investments.
Fiscal year 2018 saw operating earnings increase by 12 per cent to $8.2 million, with 97 per cent of earnings generated from recurring income sources.
Impressively, APD has more than doubled Funds Under Management (FUM) from FY13 to FY18 to $2.8 billion. Funds are spread across (mainly commercial) real estate securities funds, Industria REIT (ASX:IDR), Convenience Retail REIT (ASX:CRR), and direct property syndicates. Metrics across the portfolio are strong, with occupancy typically over 95% and backed by long-term leases. We believe recurring income is well-supported.
As at 30 June, 2018 APD had $118m of net tangible assets (NTA) on its balance sheet, mostly comprising co-investments in funds which it manages as well as directly held property (which serves to seed new property funds). This equates to NTA of 37.7 cents per share against a share price of 44.5 cents per share.
On completion of the Nowra Fund settlement, APD’s balance sheet will return to net cash position of over $20m. This gives APD significant capacity to take advantage of opportunities that are emerging in the current environment.
Clime Group owns shares in APD.