Australian real estate investment trusts (A-REITs) have come under pressure in recent times as higher global interest rates take the lustre of their 'bond-proxy' appeal.
The broader S&P/ASX 200 A-REIT Index (ASX: XPJ) has slumped almost 15% since posting a post-GFC high in July last year, underperforming the broader S&P/ASX 200 Index's (ASX: XJO) which has risen 10% over the same period. This is a direct reflection of the underperformance of many A-REIT's of late.
Accordingly, given the reliable distribution yield associated with A-REITs, I thought it is worth taking a look at three of the A-REIT Index's biggest contributors – Scentre Group (ASX: SCG), Shopping Cntrs Australs Prpty Gp Re Ltd ("SCA Property") (ASX:SCP) and Vicinity Centres Re Ltd (ASX: VCX) – as prime investment candidates for income-starved investors.
Scentre Group
Scentre Group is the property spin-off of retail shopping centre giant Westfield Corp Ltd (ASX: WFD).
Following its restructure and demerger from the bigger Westfield Group (and Westfield Retail Trust) in 2014, Scentre Group's shares have risen a formidable 32%. That's before taking into account its semi-annual distributions.
Although Scentre Group is down over 20% from its highs posted in July last year, Australia's largest A-REIT provides a solid distribution yield of 5.04% making it a strong investment candidate for dividend seeking investors.
SCA Property
SCA Property was launched in 2012 as a spin-off from supermarket giant Woolworths Limited (ASX: WOW). The group listed for $1.40 and trades well north of that price based on Wedneday's closing price of $2.22.
The rising share price has been assisted by strong growth in the commercial property sector, which has seen SCA Property's net tangible asset (NTA) backing rise to $2.12 per security. Whilst it's unlikely that the rampant growth in property values will continue, SCA Property only trades at a marginal premium to its underlying assets.
Furthermore, with funds from operations growing on the back of rental increases and lower vacancy rates across the portfolio, SCA Property remains poised to pay distributions of 13.1 cents for the year. This represents a solid 5.9% yield at current prices, making it a good time to buy the stock in my opinion.
Vicinity Centres
Vicinity Centres formed following a merger between Federation Centres and Novion Group in 2015. It is currently Australia's second largest REIT, owning a mammoth $23.6 billion of assets under management comprising blue-chip shopping centres across Australia.
Like peers Scentre Group and SCA Property, Vicinity Centres' shares have underperformed both since July 2016, posting the biggest decline of the three with a 30% fall in share price.
With Vicinity Centres' share price closing at $2.74 on Wednesday amidst the ongoing pullback in the A-REIT sector, the group currently has the smallest premium of the trio based on its NTA backing of $2.73 (as at 31 December 2016).
Alongside its robust (and growing) distributions of c. 17.6 cents per security, the current share price implies a distribution yield of 6.4%. This makes it my pick of the lot.
Foolish takeaway
Investing in A-REITs is unlikely to provide blockbuster capital growth like stock market darlings Blackmores Limited (ASX: BKL) and Domino's Pizza Enterprises Ltd (ASX: DMP) have.
Nevertheless, the current share prices of Scentre Group, SCA Property and Vicinity Centres has potential to provide long-term investors with a reliable, and growing, income stream well into retirement.
