Real estate investment trusts (REITs) like Charter Hall Group (ASX: CHC) have defied the doubters this year, with rises in interest rates not materialising and industrial, commercial, and retail demand remaining solid.
None more so than Charter Hall. It grew its profits after tax by 19.7% to $257 million in 2017, and its operating earnings by 18% to 35.9c. At the end of first quarter of 2017/18, funds under management stood at $20.4 billion. That's up almost $3 billion in the last 15 months.
In deciding whether I think Charter Hall is a buy, sell or hold, I've taken no particular macro view. I only make the general comment that property has always had a tendency to "climb a wall of worry." Rather I look at Charter Hall's performance metrics and valuation fundamentals.
Charter Hall's net asset value is $3.60. It's share price is $6.20. That's a massive 72% premium to NAV. It's worth noting that peers such as GPT Group (ASX: GPT) and Cromwell Group (ASX: CMW) trade on only 7% and 16% premiums respectively.
You are paying a hefty price for quality in buying Charter Hall, unless you take the view that the others are absurdly cheap. I don't.
The other major factor to consider is dividends. Growth in Charter Hall's dividend last year was 11.5%, to an unfranked 30c. That's no mean feat but still much lower than earnings growth of 18%. Last year's payout ratio was 85%, although this is at the bottom end of the company's future payout guidance of 85-95%. The upshot is that at 620c, Charter Hall shares yield a modest 4.8%. Compare that with Cromwell Group, for example, which yields 8.3%.
Foolish takeaway
With analysts forecasting a moderation in earnings growth in 2018, I just can't see Charter Hall's lofty valuation allowing for further share price appreciation, and quite possibly the reverse. I would avoid, and, if I were a holder, I would be inclined to take profits.
