nta, page-11

Recovery passes by the listed trusts area
Florence Chong October 30, 2008

THE listed property sector bucked the trend yesterday when it continued to drop on a day when global share markets recovered.

The listed property trusts' S&P/ASX A-REITs 200 index dropped 6.6 per cent to 956.3 while the broader equities' S&P/ASX200 index rose 1.3 per cent to close at 3845.6.

The fall came with predictions that six trusts would seek capital through the equity markets, as have other property firms such as GPT Group, Goodman Group and Stockland.

In a research note, Merrill Lynch property analyst John Kim named ING Industrial Fund, Mirvac, Tishman Speyer Office, Valad Property Group and Macquarie Office Trust as those he believed would need to make such a move.

The continued descent by Australia's listed property trusts yesterday was despite Tuesday's 17.5 per cent gain by the US REITs index on the back of the strong rally in Wall Street.

Property analysts said that historically there was a close correlation between A-REITs and US REITs.

They said the reason A-REITs were performing so poorly was because investors had lost confidence in the sector and its business model -- at least in the short term.

Investors were concerned about high gearing and the impact of the falling dollar, according to analysts.

Most agreed that the tipping point was the controversial capital raisings by two of the largest trusts -- GPT Group and Goodman Group -- which raised more than $2.3 billion in recent days.

Goodman, which resumed trading yesterday after a three-trading-day halt, slipped 7 per cent to close at 93c while GPT closed 1.16 per cent lower at 85c a unit.

Goodman raised $755 million in fresh capital at 90c a unit and planned to raise further cash from its dividend reinvestment plan and asset sales, potentially totalling more than $700 million in the next 12 months.

Both capital raising were criticised for being heavily dilutive to earnings. Both Merrill Lynch and Goldman Sachs JBWere downgraded Goodman following Tuesday's capital raising.

"We are moving GMG (Goodman) to neutral from buy," Mr Kim said.

Mr Kim was concerned about Goodman's ability to refinance $690 million of expiring debt through 2009 because of an illiquid debt market.

He also raised concerns about Goodman's high level of gearing in its British and European business park funds (49 and 59 per cent respectively).

Merrill Lynch said the exclusion of $66 million of development management fees from its earnings guidance in 2009 suggested that Goodman was no longer collecting fees from around $1.5 billion of projects.

Goldman Sachs JBWere downgraded Goodman from a "buy" to a "hold", after the capital raising and revised guidance.

In his note, GSJBW's Peter Zuk said the equity raising highlighted the risks that the company faced in terms of freeing up capital through asset sales in the short term.

He said Goodman faced a "large headwind" to restore earnings growth from the 2010 financial year onwards.

GSJBW head of REIT research Simon Wheatley said the Goodman raising caused a new dilemma for the REIT market.

Unlike some other capital raisings, the Goodman raising was not triggered by being near a breach of its debt covenants.

Mr Wheatley wrote: "We fail to comprehend that the capital raising announced today was in isolation simply a recapitalisation to restore faith in Goodman."

He said the cost of equity was "enormous" and aside from the falling share price there was no identifiable trigger.

Despite his reservations about the business case for the capital raising, Citigroup's property analyst Peter Cashmore upgraded the stock from hold to buy.

In his note, he wrote that, based on Citigroup's calculations, the capital raising alone effectively diluted 23 per cent of Goodman's base earnings.

http://www.theaustralian.news.com.au/business/story/0,28124,24572721-25658,00.html