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1、23 March 2020AustraliaEQUITIESQuality has consistent outperformed in recessions/bear marketsListed Property SectorQuality time to deal with stressKey points Tactical tilt towards Quality given current market conditions are expected to be impacted by Covid-19 for some time. Retail malls remain under

2、pressure. Financial covenants and debt facility maturities can withstand stressed scenarios from Covid-19 impacts. Key Outperform recommendations: GMG, MGR, CHC, GPT and DXS. We upgrade GPT to OP; and SGP to Neutral. Downgrade LLC to Neutral.Quality outperformsQuality underperformsIndex performance

3、vs S&P500 (%) 30.0%25.0%20.0%15.0%10.0%5.0%-%(5.0%)(10.0%)(15.0%)95 97 99 01 03 05 07 09 11 13 15 17 19MGR, GMG, SGP, and GPT screen as Quality REITs3529EventWe have reviewed the potential impact of Covid-19 on earnings of the large2525301725231220151050251113cap real estate groups. As an extension

4、of our work released on 6 March 2020 (Growing your defences), we have also stress tested their balance sheets.ImpactShifting investment style to Quality. We have reviewed which investmentDXS CHC GMG MGR LLC GPT SGP SCG VCXFinancial leverage (Net debt / EBITDA) Financial leverage (D/A)AccrualsReturn

5、on equityEarnings impact from Covid-19 on the large cap REITsEarnings impact in FY20 (%)style consistently performs in recessions/declining markets in the S&P 500. It is no surprise that portfolios tilted towards Quality consistently outperform the broader equity market. Quality is measured as retur

6、ns on equity; accrual ratio (essentially cash backed earnings); and financial leverage. MGR, GMG, SGP, and GPT screen as Quality in the A-REITs.Industrial and office preferredissues in retail accelerated. Industrial and16%14%12%10%8%6%4%2% 0%0%4%3%12%5%10%14%6%15%office sectors remain the most prefe

7、rred, with underlying tenant covenants that are relatively more resilient in a Covid-19 impacted economy. While office utilisation is low, given working from home arrangements, we expect DXS to reaffirm their FY20 guidance. Retail malls are facing increasing pressure to offer rental abatements for t

8、enants. As a sensitivity, three months of 50% rental abatements for specialties represent 12% and 11% earnings headwindDXS CHC GMG LLC MGR GPT SGP SCG VCXNotes: 1. We note our Quality is measured as returns on equity; accrual ratio (essentially cash backed earnings); and financial leverage.Source: F

9、actset, Macquarie Research, March 2020AnalystsMacquarie Securities (Australia) LimitedDarren Leung +61 2 8232 8544 HYPERLINK mailto:darren.leung darren.leungStuart McLean +61 2 8232 2859 HYPERLINK mailto:stuart.mclean stuart.mcleanCaleb Wheatley +61 2 8237 6699 HYPERLINK mailto:caleb.wheatley caleb.

10、wheatleyfor SCG and VCX, respectively. We note this is before ancillary income, which is typically a variable revenue item as well. Residential markets are likely to face near-term settlement delays/defaults and lower sales volumes. Resi should benefit in the medium term due to low rates and undersu

11、pply.Balance sheetsdealing with the stress. We focus on: 1) upcoming debt facility maturities; and 2) financial covenants. SCG is the only large cap REIT with upcoming maturities in the next 18 months that is not covered by existing debt facilities and/or cash. The REITs are generally sufficiently f

12、ar away from the financial covenants. As a sensitivity, SCG and VCX need to see asset values decline by 49% and 44%, respectively, to breach gearing covenants.Stock recommendationsDXS, GMG and GPT are our preferred defensive names, while CHC and MGR should have good leverage when the market focuses

13、on post Covid-19. We remain underweight the retail landlords (SCG, VCX both rated Underperform), with downside risk from Covid-19 in the near term and potential rent resets in the medium term.We downgrade LLC to a Neutral, factoring elevated risk in timing of development returns resulting in downsid

14、e risk to the balance sheet. We upgrade SGP to a Neutral due to the implied residential valuation. We upgrade GPT to Outperform, given a strong balance sheet and defensive characteristics.Please refer to page 24 for important disclosures and analyst certification, or on our website HYPERLINK /resear

15、ch/disclosures /research/disclosures.REIT large cap coverage recommendation, Price Target and earnings changesFig 1 Earnings changesTickerReported EPS - OldReported EPS -NewChangeFY20FY21FY20FY21FY20FY21CommentaryCHC68.653.566.047.2(3.8%)(11.8%)Driven by lower transaction volumes and other active fe

16、es.DXS69.271.968.972.1(0.3%)0.2%Lower retention of expiries in FY20GMG57.763.055.856.9(3.3%)(9.8%)Lower development activity with partial second order impact of lower AUM growthGPT34.035.230.735.4(9.7%)0.4%FY20 primarily impacted by assumptions on rental abatementsLLC126.1142.7111.4115.0(11.6%)(19.4

17、%)Lower profitable recyclingMGR17.517.116.616.6(5.3%)(2.8%)Retail rental abatements plus deferral of residential settlements into 1H21SCG25.326.321.726.6(14.0%)1.3%Retail rental abatements; lower turnover rent and ancillary incomeSGP37.537.935.236.5(6.1%)(3.5%)Lower residential volumes in FY20/FY21.

18、 FY20 also impacted by rental abatementsVCX17.418.014.917.0(14.7%)(5.3%)FY20 impacted by rental abatements and lower turnover rent & ancillary incomeFig 2 Valuation changesValuation - OldValuation - NewChangeCommentaryLowHighPrice TargetLowHighPrice TargetLowHighPrice TargetCHC14.3115.2315.238.749.6

19、19.61(39%)(37%)Lower FM earnings as well as lower FM (37%)multiplesDXS12.9814.2513.6211.5411.8811.71(11%)(17%)Less cap rate compression and lower income(14%)assumptionsGMG13.5415.5917.339.7811.2312.97(28%)(28%)Lower FM/development multiples given market (25%)movementGPT5.956.586.265.115.705.40(14%)(

20、13%)Reduction in book value assumptions, (14%)particularly in retailLLC14.7618.9616.8612.1216.3214.22(18%)(14%)Reduction in development and capital recycling(16%)multiplesMGR3.023.453.572.592.922.92(14%)(15%)Cap rate expansion in retail and lower (18%)development multiplesSCG3.924.463.472.903.522.34

21、(26%)(21%)Increase in cap rate expectations and lower income growth expectations. Move to lower end(33%)of valuationSGP4.504.934.713.123.603.36(31%)(27%)Reduction in residential multiple, as well as (29%)lowered NTA expectations (particularly in retail)VCX2.602.922.222.042.411.71(22%)(17%)Increase i

22、n cap rate expectations and lower income growth expectations. Move to lower end(23%)of valuationFig 3 Recommendation changesOldNewThesisCHCOutperformCHCs FM business is trading on 14x vs highs of 28x vs LR avg of 15x. With the 10-year low of 12x approaching, we value Outperformis appearing. While tr

23、ansaction volumes will be limited in the short term, the yield curve will likely remain supressed whichshould support capital investment into real estate markets. CHC has no debt expiring before 2022.DXSOutperformOutperformDXS offers stable contracted income with relatively more solid tenant covenan

24、ts. The balance sheet is also in goodposition to capitalise on opportunities should they arise.GMGOutperformDevelopment has been a key driver of growth in the GMG business. Demand for industrial product is likely to remain Outperformresilient in a COVID-19 world. The balance sheet is sound with $2.5

25、bn of undrawn debt facilities or cash which allows thegroup to restock its landbank should favourable pricing arise.GPTLLCNeutralOutperformOutperformNeutralUpgrade to Outperform. GPTs balance sheet is in a strong position, with just $100m of debt expiring by Dec-2021. 57% of assets are in office and

26、 logistics that are unlikely to be as impacted as much when compared to the retail. With market volatility likely to continue, we believe GPT can perform well in the current environment.Downgrade to Neutral. In our review of the LLC balance sheet and near-term EPS profile we highlighted a reduction

27、inmarket transactional activity will likely negatively impact the P&L, cashflow and the balance sheet. With COVID-19 risks escalating over the past week, the risks here have increased.MGROutperformOutperformMGR is a quality company with a track record of solid asset allocation. The passive parts of

28、the business are office which offers stable income; and retail which faces similar issues as other retail assets but represents a relatively smaller portfolio of group earnings. MGR has a strong balance sheet and should benefit from an upswing in residential post COVID-19.SCGUnderperformUnderperform

29、SGPUnderperformNeutralVCXUnderperformUnderperformConditions in malls remain challenging with underlying tenant covenants under question. A key risk remains Australia closing shopping centres and other public venues more broadly. On face value, SCG is trading at an attractive discount to NTA and a re

30、latively high DPS yield but we believe there is downside risk to the distribution.Upgrade to Neutral. Since 21-Feb, SGP has underperformed the ASX 200 by 40% and the ASX 200 REIT index by 30%. Headwinds include retail rental abatements, lower resi sales/settlements and downside risk to retirement. U

31、pside will come from the resi book post recessional impacts of COVID-19. The balance sheet is healthy, with enough liquidity through to FY22 and significant room to covenants.VCX is trading at a 60% discount to NTA and is offering a 12% DPS yield. COVID-19 could have lasting impact on the retail sec

32、tor. While Australia has not closed shopping centres, this is still a risk. Further, the defensive nature of fortress assets such as Chadstone will be questioned. Retain Underperform.Notes: VCX and LLC had their price targets and earnings revised ahead of this report. Fig 1 CHC, GMG and LLC are adju

33、sted EPS; all others FFOps Source: Macquarie Research, March 2020Quality consistently outperforms during a downturnWe have used the broader market indices to assess which factors typically outperform in a market downturn/recession.S&P 500 Value Index measures stocks using three factors: 1) price to

34、book; 2) price to earnings; and3) price to revenue.S&P 500 Growth Index measures stocks using three factors: 1) sales growth; 2) ratio of earnings change to price (P/E expansion); and 3) momentum.Fig 4 Value mixed track record in downturnsFig 5 Growth Mixed track record as wellValue outperformsValue

35、 underperformsIndex performance vs S&P500 (%) 20.0%15.0%10.0%5.0%-%(5.0%)(10.0%)(15.0%)(20.0%)95979901030507091113151719Index performance vs S&P500 (%) 20.0%Grow th outperformsGrow thunderperforms15.0%10.0%5.0%-% (5.0%)(10.0%)(15.0%)95979901030507091113151719Source: Factset, Macquarie Research, Marc

36、h 2020Source: Factset, Macquarie Research, March 2020 The S&P 500 Quality Index is designed to track high quality stocks in the S&P 500 by quality score, which is calculated based on return on equity, accruals ratio and financial leverage ratio.The S&P 500 Momentum is designed to measure the perform

37、ance of securities in the S&P 500 universe that exhibit persistence in their relative performance.Fig 6 Quality a consistent outperformerFig 7 Momentum varied successQuality outperformsQuality underperformsIndex performance vs S&P500 (%) 30.0%25.0%20.0%15.0%10.0%5.0%-%(5.0%)(10.0%)(15.0%)95979901030

38、507091113151719Index performance vs S&P500 (%) 35.0%Momentum outperformsMomentum underperforms30.0%25.0%20.0%15.0%10.0%5.0%-%(5.0%)(10.0%)(15.0%)(20.0%)95979901030507091113151719Source: Factset, Macquarie Research, March 2020Source: Factset, Macquarie Research, March 2020 With portfolios geared towa

39、rds quality generally outperforming in a recession, we have conducted a quality analysis of the large cap REITs under coverage. We use four metrics:Return on equity (essentially FFO / total equity). Higher is better.Accrual ratio (AFFO less FCF / total assets). Lower is better.Financial leverage as

40、measured by debt / assets. Lower is better.Financial leverage as measured by net debt / EBITDA. Lower is better. Note, we have look-through gearing. CHC has balance sheet gearing of 10% and look-through gearing of 35%.Fig 8 RoE developers have highest returnsFig 9 Accrual ratio rent collectors are s

41、uperioron equity (%)16.512.17.25.45.45.36.45.19.6Return 18.016.014.012.010.08.06.04.02.0-DXSCHCGMGMGRLLCGPTSGPSCGVCXAccrual r 1.5%atio (%)1.3%0.6%0.2%0.0%0.1%0.2%(0.1%)(0.4%)(0.5%)1.0%0.5%-% (0.5%)(1.0%)DXSCHCGMGMGRLLCGPTSGPSCGVCXNotes: 1. All metrics are pro-rated for the 12 months ending December

42、2019.Source: Factset, Macquarie Research, March 2020Notes: 1. All metrics are pro-rated for the 12 months ending December 2019.Source: Factset, Macquarie Research, March 2020 Fig 10 Net debt / EBITDA more gearing in retail REITsFig 11 Debt / assets more gearing in retail REITs6.7x5.2x5.5x5.1x4.3x4.1

43、x3.5x1.1x0.6xNet debt / EBITDA (x) 8.0 x7.0 x6.0 x5.0 x4.0 x3.0 x2.0 xx- xDXSCHCGMGMGRLLCGPTSGPSCGVCXDebt / total assets (%) 40.0%35.5%33.0%26.1%27.3%21.1%23.0%20.8%22.1%25.5%35.0%30.0%25.0%20.0%15.0%10.0%5.0%-%DXSCHCGMGMGRLLCGPTSGPSCGVCXNotes: 1. All metrics are pro-rated for the 12 months ending D

44、ecember 2019.Source: Factset, Macquarie Research, March 2020Notes: 1. As at 31 December 2019. 2. We have used look-through gearing. Source: Factset, Macquarie Research, March 2020 We have then attributed a ranking relative to the other large cap REITs. The better the metric, the higher the rank it r

45、eceived. Given an equal weighting between each of the metrics, we note a disproportionate skew towards financial leverage, although the conclusion is unchanged even if we exclude either one of the financial leverage metrics.Fig 12 GMG, MGR, SGP and GPT are screening as Quality REITs29232511131217252

46、535302520151050DXSCHCGMGMGRLLCGPTSGPSCGVCXReturn on equityAccrualsFinancial leverage (D/A)Financial leverage (Net debt / EBITDA)Notes: 1. Each score is a relative ranking against the other peers on this chart. (e.g. CHC RoE was 15.6% hence it received 9 being the highest score).Source: Macquarie Res

47、earch, March 2020Charter Hall (CHC) OutperformInvestment thesis: We have cut our FY20 Operating EPS by 4% and FY21 by 12% to reflect a reduction in near-term transaction volumes, as well as a decline in other fees as a result of broadly lower activity (e.g. development fees, leasing fees etc.).CHCs

48、FM business is trading on 14x (ex. performance and transaction fees), which compares to highs of 28x, and a long run average of 15x. With the ten-year low of 12x approaching, we believe value is appearing in this name. While transaction volumes will be limited in the short term, the yield curve will

49、 likely remain supressed for several years. CHC should be able to take advantage of a desire for third parties to deploy capital into real estate markets.CHC has a strong balance sheet with no debt expiring in the next two years. Retain Outperform.Key analysisA key headwind to CHC over coming months

50、 will be the reduction in real estate market activity. This will impact multiple lines in the groups P&L, including transaction volumes (lowers both transaction and base fees) and other line items including leasing and development.We have forecast a significant reduction in 2H20 vs 1H20 in active le

51、asing, development and transaction fees. Further, we assume only $0.4bn of transactions in 2H20 and $1bn in 1H21 (1H20: $7bn).Fig 13 We forecast a significant reduction in active fees in 2H20 and no recovery into 1H21Income StatementFunds ManagementFund Management FeesProperty Management Fees$m$m1H2

52、0A71.28.32H20F77.88.51H21F81.78.92H21F86.89.62H20 vs1H209.3%2.3%1H21 vs1H2015%8%- Leasing Fees$m11.46.56.713.0-43.0%-41%- Development Management Fees$m9.05.86.012.6-35.2%-34%- Performance & Transaction Fees$m187.43.917.528.5-97.9%-91%Total Funds Management$m287.3102.5120.8150.5-64.3%-58%Source: CHC,

53、 Macquarie Research, March 2020The below provides a sensitivity to further declines in real estate activity and the implications on the CHC P&L. If active fees were to fall by a further 50%, this would be a 15% headwind to CHC EPS.Fig 14 If active earnings declined by a further 50% vs our limited ex

54、pectations, this would be a 15% headwind to EPSFY21Lower transaction volumes vs expectations by $1bn (i.e $1bn of transactions,vs $2bn assumption)50% less other activity vs MRE expectationsPro-formaChangeFM fees168.6(4.0)164.6-2%Property Management18.518.50%Leasing (2H skew)19.8(9.9)9.9-50%Developme

55、nt (2H skew)18.5(9.3)9.3-50%Transaction (2H skew)30.9(15.5)15.5-50%Performance1515.00%Total FM271.3232.7-14%Co-investment125.0125.00%Development15.0(7.5)7.5-50%Expenses(138.0)(138.0)0%Depreciation(7.6)(7.6)0%EBIT265.7219.6-17%Net interest expense(7.7)(7.7)0%Operating Earnings pre-tax258.1212.0-18%Ta

56、x(38.6)5.37.3(25.9)-33%Operating Earnings post-tax219.5186.0-15%Source: Macquarie Research, March 2020Our forecasts do not assume a decline in asset values. We believe CHCs diversified portfolio, including significant exposure to long WALE asset classes and preference for office/logistics over large

57、 mall exposures will help alleviate downside risks. While cap rates may expand in the short term given the rise in credit spreads, the spread between cap rate and yields should be attractive on a 12-18 month view.Fig 15 Limited AUM growth expected in the current periodFig 16 EPS sensitivity to base

58、fee declines and active earningsFUM ($bn)504540353025201415105-MRE forecast40 453923300%Base fee decline 10%25%50%Active earnings decline0%10%25%50%0%-5%-14%-27%-3%-9%-17%-30%-8%-13%-21%-35%-15%-21%-29%-43%FUM grow th (%)5035%30%25%20%15%10%5%0%1820Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Dec-19 Jun-20 Ju

59、n-21 Jun-22FUMGrowth (RHS)Source: Company data, Macquarie Research, March 2020Source: Macquarie Research, March 2020 Comparing multiples. CHC is currently trading on a next twelve month implied FM multiple of 12x. While it is a long way off recent highs of 25x, it still remains slightly above the te

60、n-year average of 10 x given our expectations of a significant reduction in performance and transaction fees (of $21m over the next 12 months vs ten-year avg of $50m). If we exclude performance fees and transaction fees, CHCs FM business is trading on 14x, which compares to recent lows of 12x.Fig 17