Investing in a specialist property group at a significant discount to net tangible assets can prove very rewarding, and even more so if the earnings outlook is promising. The following three companies are well placed for outperformance over the medium term.
Astro Japan Property Group (ASX: AJA) owns commercial and residential buildings mainly located in the heavily populated Osaka and Tokyo areas. Retail properties comprise 56% of the portfolio, with offices 34% and residential 10%.
There are strong signs Japanese commercial property is in for a period of sustained positive performance. Tokyo-listed real estate investment trusts have experienced active trading over the past six months and large property transactions are on the increase.
Japan is finally breaking free from two decades of economic stagnation and a 60% increase in the Topix index over the past year underscores growing confidence. There is a positive outlook for asset and income returns from commercial property.
Astro's property portfolio currently has an occupancy rate of 96.8%. By Australian standards, the gearing ratio of 60% looks high; however, the cost of debt averages 2.7%.
Trading at $3.61, Astro Japan is selling at a 36% discount to net asset backing of $5.59 and has a distribution yield of 5.6%.
FKP Property Group (ASX: FKP) is well on the way to establishing itself as a leading force in the retirement homes market. A recent $230 million share issue has reduced gearing to 19.3% and there is still a further $760 million of written-down noncore assets to be realised. On 10 December 2013, FKP will change name to Aveo Group (ASX: AOG) to fully signal the concentration on retirement villages.
Currently FKP/Aveo owns or operates 76 retirement villages on the eastern seaboard. Depending on specific location residential units can be freehold, leasehold (40-year leases) or effectively rented. Favourable demographics ensure sustained growth in this sector due to the aging baby boomers and the attractions offered by the village lifestyles (convenience, medical access, activities, facilities, etc).
Management has expressed confidence that the remaining noncore assets will be sold at the revised book values. If so, FKP ($1.94) is selling at an 16% discount to adjusted net asset value (approx. $2.30) and the intention is to resume paying healthy dividends in the current year.
Galileo Japan Trust (ASX: GJT) is another Japan-focused real estate trust with the majority of properties located in the Tokyo area. Galileo suffered badly in the GFC fallout and recently restored its balance sheet with a large share issue. After this recapitalisation Galileo ($1.49) sells at a 30% discount to net asset value and a 10% distribution in the 2014 year, however it remains highly geared.
Foolish takeaway
Investing in specialist property groups is not for everyone and you have to keep a close watch on operating performance. These three suffered considerable damage to their balance sheets in the aftermath of the GFC and all have recapitalised in recent months. They are now in a good position to grow earnings over the medium term and are priced at substantial discounts to net asset values. All are worth consideration as part of a diversified property related equity portfolio.
