in property we can again place our trust

From the AGE business section

The last paragraph is interesting shows confidence in huge rebound coming.

Business

In property we can again place our trustJanuary 14, 2010

Prospects for real estate trusts are looking brighter, which means sector consolidation can't be far away.

As the listed property trust sector prepares its accounts before the reporting season next month, talk is turning to Stockland Group's intentions for the country's oldest listed property trust, GPT, as the expiry date on a strategic economic interest looms in May.

Other pressing decisions include a recapitalisation of Becton's unlisted trusts, which together have more than $1 billion of property assets, and how Centro will be restructured following the appointment of a new chief executive and new investment bank in the past few weeks.

It has been widely reported that the Australian REIT sector has raised more than $14 billion in fresh equity in the past year to recapitalise damaged balance sheets. What isn't as apparent is that some of the players are flush and ready to do deals. After debt repayments, there is an estimated $5 billion waiting to be put to use. The feeling is that the worst is over for the REIT sector, which means M&A activity is not far away.

Most REITs are still trading at a big discount to net asset backing, making it cheaper to buy the trust than the individual real estate assets.

As reporting season begins next month, attention will be on Stockland's strategy for GPT. Through an off balance sheet equity swap with Deutsche Bank, Stockland holds a 13 per cent economic interest in GPT.

These derivatives expire in May, which means the clock is well and truly ticking on whether Stockland lets the equity swap expire, rolls it over, makes a takeover bid, or partners with another strategic investor, most likely the Singaporean GIC Real Estate Group, to make a bid for GPT in such a way that it is acceptable to GPT shareholders and isn't hugely dilutive to Stockland.

How this could work is the big question, but one option could involve divvying up the assets between GIC and Stockland, which together hold 25 per cent of GPT. Another option could be for GIC to take a cross-shareholding in Stockland and form a joint venture. GIC has an ever-growing presence in the Australian property market, with stakes in listed and unlisted REITs, and direct asset holdings.

Stockland has long coveted GPT. It made an unsuccessful all-scrip bid in 2004 at $3.60 a share and, last May, Matthew Quinn made it clear that he was still keen to buy GPT.

Fast forward to now and the chance of Stockland making an outright bid for GPT is slim. From Stockland's perspective, an outright bid for GPT would be heavily criticised by investors on the basis that it would be dilutive to Stockland. Put simply, GPT is trading on an equity yield of about 6.7 per cent, compared with Stockland's 7.5 per cent, which would give it a cost-of-capital disadvantage.

From GPT's point of view, the board would argue that any bid below 71 would grossly undervalue the company. GPT is trading at 58 but its net tangible assets are valued at 71 a share. In addition, any deal with Stockland would replace stable rent for volatile property development earnings, particularly as the first home owners grant is being wound back.

But Stockland has to do something. It has more than $500 million theoretically tied up in GPT that is overhanging the stock. Indeed, it is this economic interest in GPT that has been attributed as the largest driver behind the de-rating of Stockland in the market.

If it lets the derivatives lapse, its share price will no doubt go up, but if it rolls them over without proffering a clear strategy, it will be castigated by the market.

While the big REITs such as GPT and Stockland have sorted out their balance sheets and are looking at corporate activity, issues remain with some of the mid-ranking REITs such as Becton. Back in November Becton told shareholders that the capital structure of the parent company and its unlisted funds was ''unsustainable'' in its current form.

The company is mulling over a broad range of recapitalisation and restructuring options, including asset sales, and inviting a cornerstone investor into the enterprise, copying a similar model as Orchard, Abacus and Charter Hall.

The funds on offer include Becton Retail Fund, Becton Diversified Property Fund, Becton Diversified Direct Property Fund, Becton Office Fund, Becton Office Fund No. 2 and Becton Industrial Fund.

But the biggest property carve-up will no doubt occur in Centro - which owns 733 shopping centres, worth $20 billion, of which two-thirds are in the US - which needs to raise about $8 billion to cut its debt.

New chief executive Robert Tsenin said Centro had ''way too much leverage'' and he would work with the advisers to find ways to recapitalise and restructure the group. Just before Christmas, JPMorgan Chase and the New York-based boutique advisory firm Moelis were appointed to work with Centro on long-term strategies to deal with its debt.

Not surprisingly, hedge funds have been loading up to the gills on debt, no doubt to get a seat at the table.