lpts show each-way potential ...

Source: www.news.com.au/heraldsun

LPTs show each-way potential
John Beveridge
May 15, 2009 12:00am

THERE is plenty of "potential" in the listed property trust sector at the moment.

The real problem for investors is working out if the potential is to lose money or to make it.

No sector has had a harder landing in Australia than the LPTs (or REITs, to use the American term) and for many sound reasons.

Their prices had been bid up to ridiculous levels, thanks to the enthusiasm of yield hungry investors.

And to keep those investors happy, LPT managers had strayed far from the original mandate of simply collecting the rent on commercial properties such as offices, shopping malls and factories.

Most had built in all sorts of development risk into their companies and mountains of then cheap debt had been accumulated to help prop up yields.

When the credit freeze came and debt and complex structures were suddenly seen as poison, the sector as a whole fell 75 per cent from its 2007 share price highs with many of the most troubled small stocks losing 90 per cent of their value.

Naturally this has been a devastating event for the legions of retirees and conservative investors who often viewed LPTs and banks as the yield cornerstone of their share market investments.

It was also a troubling development for LPT managers, who have engaged in an unprecedented rash of capital raisings to repay debt and knock their balance sheets into a healthier position.

For shareholders with cash that has either provided an opportunity to buy more stock at discounted prices or a bear trap allowing them to throw good money after bad.

For those without cash, it has added severe equity dilution and plummeting distributions to their long list of grumbles.

In the past six months alone, Aussie-listed property companies have raised almost $12.5 billion from investors.

Some, like damaged giant GPT, have now gone to the well twice with capital raisings worth almost $3.3 billion.

Even industry behemoth Westfield, which had wisely tapped the market for $3 billion at the peak in mid-2007, has since written down its property portfolio by $3 billion and raised another $2.9 billion to reduce debt.

Smaller, more complex property players like shopping centre group Centro are effectively being run to keep their banking syndicate happy as massive losses are digested.

The really vital question for investors is where does the LPT sector go from here?

And like predicting the future of the broader economy, that is a particularly cloudy crystal ball to look into at a time when negative surprises arrive every week.

The bullish case from the "catch the falling knife" brigade is that the property companies that survive are going to emerge in much stronger and more sustainable shape at the other end.

Debt levels will be lower, their business much easier to understand and the internal focus on costs and profit will be razor sharp.

Even better, the strong companies that survive will eventually be able to gobble up the weak at bargain prices once credit and equity markets finish thawing.

On the macro side, the property bulls think that the massive amounts of government and central bank stimulus will finally succeed in re-inflating the world economy, producing a period of inflationary growth which will benefit property companies.

While inflationary growth is bad for many businesses, they argue it will be good for property trusts because it will increase the value of their properties at the same time as it reduces the real value of their debts -- the reverse side of the current coin.

The bearish case is similar to the bullish one but differs on the timing.

That is that the deflationary leverage which has savaged the balance sheets of even conservatively geared property trusts has a long way to run.

So many more tenants of shopping centres, industrial parks and offices will go broke, leaving empty space and negative returns behind them for the property groups to absorb.

With commercial property values continuing to fall, rising debt ratios will keep spooking banks at the same time as equity markets clam up as the bear market rally runs out of steam.

So there is a whole world of pain to go through before the green shoots of recovery are strong enough to sustain positive returns for LPT investors.

Being an incurable optimist, I like the bullish scenario the best but any objective guesstimate would have the bull/bear cases at even money at the moment.

I N THE really bad old days of Australian mining, it was not unknown for drill core samples to be "salted" with the mineral being searched for.

When the positive results were then released to the market, the guilty miners would chip windfall profits out of the share market rather than the ground.

Thankfully, those days are long behind us in the days of joint ore reserves committee (JORC) compliant statements.

An Australian innovation, JORC compliance is fast becoming an international standard with estimated reserves put in the inferred, indicated or measured categories as more detailed drilling information comes in.

The JORC code is only as strong as compliance allows, which is why the Australian Securities Exchange yesterday released the results of a six-month crackdown on our 800 listed miners and explorers.

On the surface, the results weren't too flash, with 6 per cent of the 5200 ASX announcements needing correction.

But when you drill deeper into the mistakes, the vast majority of them centred around the absence or a problem with the competent person statement.

Other common mistakes were including pre-JORC results without applying for a waiver, deficiencies in reporting grades and quality of targets, selective reporting of drill holes and not stating whether a resource is inferred, indicated or measured.

Taken as a whole the results show some explorers have taken a while to adjust to new, stricter requirements on "gilding the lily" in their announcements rather than any outright shenanigans.

And like all crackdowns, you can be sure that the lessons will have been taken to heart so that fewer miners will be embarrassed by the need to correct their ASX statements in the coming six months.


Ends.

Cheers, Pie :)