Failure Becomes Fortune as Property CDS Drop: Australia Credit

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Failure Becomes Fortune as Property CDS Drop
The Westfield Group logo is displayed outside a shopping center next to the Sydney Tower, center, in Sydney, Australia. Photographer: Brendon Thorne/Bloomberg

After pulling back on failed global expansion strategies, Australian property companies are gaining bondholder confidence as they return to their rent-collecting roots and take on partners to share development risks.

Credit-default swaps on GPT Group, Westfield Group and Lend Lease Group tumbled the most among companies in the Markit iTraxx Australia gauge in 2012, according to data provider CMA. The declines all outpaced the 74 basis-point drop on an index of contracts on global real estate companies, the data show. GPT is boosting retail rents 4.5 percent this year and has an occupancy rate of 99.1 percent, while Westfield and Lend Lease have signed deals with pension funds to jointly fund projects.

Australian property trusts sold off assets from Europe to the U.S. after a global buying spree before the 2008 credit freeze saddled them with billions in losses on overseas investments. The S&P/ASX 200 Real Estate Index has surged 19 percent this year, more than double the benchmark gauge’s gain, as investors bet that the fastest forecast economic growth among the Group of 10 will support property values and lease payments.

“They’re in terrific financial shape,” Stephen Hiscock, managing director and portfolio manager for listed property trusts at Melbourne-based SG Hiscock & Co. said in a telephone interview. “They’re still trying to make money but they’re trying to do it in a much more risk-controlled manner.”

The average price of credit-default swaps for four of the nation’s biggest property companies -- GPT, Westfield, Lend Lease and CFS Retail Property Trust -- fell 112 basis points this year to 202 basis points yesterday and reached a 13-month low on Sept. 17, the CMA data show.

Rent Growth

Sydney-based GPT, which reported a 13 percent increase in net income to A$275.5 million ($285.8 million) in the six months ended June 30, expects rent growth to help drive an earnings increase of at least 7 percent in the year ending Dec. 31, it said in August.

Australia’s second-biggest diversified property trust expects rental growth of between 3.4 percent and 4.5 percent across its properties in 2012 and a decline in debt costs to 5.7 percent, the company said.

The relative yield on GPT’s A$250 million of 6.75 percent notes due in 2019 fell to 179 basis points more than swap rates on Sept. 28, the narrowest spread since they were issued in January, Commonwealth Bank of Australia prices show.

“GPT’s balance sheet is very strong with debt-to-total assets at 20 percent and interest coverage of 4.7 times as at the end of June,” said Michael O’Brien, the company’s former chief financial officer who is now heading up GPT’s new business area of corporate development. “It’s great to see the company’s strong position demonstrated through the competitiveness of pricing of debt we’ve accessed.”

CFS Retail spokeswoman Penny Berger didn’t immediately respond to e-mailed requests for comment. Westfield spokeswoman Julia Clarke declined to comment.

Falling Risk

The cost of insuring GPT’s debt dropped 245 basis points to 155 yesterday from a high of 400 on Oct. 4 last year, CMA prices show. Westfield default swaps declined to 167 from a peak of 388 the same month, and Lend Lease’s fell 197 basis points to 341. CFS Retail contracts slid 159 basis points to 145 from a peak on Nov. 25.

The average cost of credit-default swaps on the four companies peaked at 909 basis points in April 2009 amid the financial crisis sparked by the U.S. subprime mortgage collapse, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Australians spent twice as much as Middle Eastern investors on U.S. real estate from 2005 to mid-2007, and almost three times more than Germans, according to New York-based Real Capital Analytics Inc., a provider of data on the U.S. property market. That backfired when property values tumbled and borrowing costs spiked because of the credit crunch, forcing companies to write down and sell offshore assets and replenish balance sheets ravaged by losses.

Shares Surge

Westfield’s share price has surged 31 percent this year as of 1:36 p.m. in Sydney, while CFS Retail saw a 16 percent gain. GPT’s has jumped 12 percent and Lend Lease’s shares climbed 9.6 percent. That compares with an 8.9 percent gain in the benchmark S&P/ASX 200 Index.

CFS Retail’s distributable earnings rose 6.1 percent in the year ended June 30, and the company said it has fixed rental increases of 5 percent for its specialty store tenants. Its cost of debt fell to 6 percent from 7 percent a year earlier.

The Sydney-based mall operator “continues to benefit from structural rent increases,” Lou Pirenc, a real estate analyst at Morgan Stanley, wrote in a report in August. “With the average cost of debt expected to be 5.5 percent in fiscal year 2013, this will benefit both underlying earnings and improve the cost of capital for future projects.”

Debt Costs

Debt costs have dropped for property companies as 1.5 percentage points of central bank interest-rate cuts since November lowered the cost of money in the South Pacific nation.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the overnight cash-rate target by a quarter percentage point to 3.25 percent, the central bank said in a statement in Sydney today. The decision to end a three-month pause was predicted by nine of 28 economists surveyed by Bloomberg News.

Benchmark 10-year bond yields have fallen 114 basis points over the past 12 months and were at 2.96 percent in Sydney after the RBA decision.

The Australian dollar, the world’s fifth most-traded currency, bought $1.0323.

The Markit iTraxx Australia index was little changed at 159 basis points as of 10:08 a.m. in Sydney, according to Westpac Banking Corp. The gauge of corporate bond risk reached a six-month low of 135 on Sept. 14, CMA data show. The gauge is a benchmark for insuring bonds against default and traders use it to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Westfield Bonds

Westfield sold $500 million of 2022 notes on Sept. 24, paying a spread of 180 basis points more than Treasuries, according to data compiled by Bloomberg. The Sydney-based company paid a 350 basis-point spread on 10-year debt in 2009, the data show.

The extra yield that Westfield’s $1 billion of 4.625 percent notes due in 2021 offer over U.S. swap rates shrank to a low of 175 basis points at 2:38 p.m. in Sydney today from as high as 249 in June, Royal Bank of Scotland Plc prices show.

Westfield this year sold stakes in 12 U.S. malls to the Canada Pension Plan Investment Board to raise $2.1 billion to fund development projects. It jointly owns Australian and New Zealand malls with Westfield Retail Trust, and is partnering with local groups in Brazil and Italy to develop new shopping centers.

For companies including Westfield and Lend Lease, which rely on higher-risk activities such as development to boost earnings, tie-ups with “very large, very well-resourced capital partners” are helping to reduce risk, Hiscock said.

“There’s a clear trend toward capital partnering,” he said. “If it reduces risk without materially changing the outcome, then it’s obviously a very significant positive.”

Stake Sales

Lend Lease in July said it won A$2 billion in commitments from Canada Pension, Telstra Super and its own unlisted fund the Australian Prime Property Fund Commercial, to build the first two towers of its A$6 billion Barangaroo redevelopment on Sydney’s harbor.

The improved perception of Lend Lease in debt markets “reflects the underlying financial strength of the group and our continued progress on Barangaroo,” Lend Lease spokeswoman Vivienne Bower said in an e-mail.

“There’s quite a lot of demand from institutions to come into this space” and partner with developers, said Tony Sherlock, head of property research at Morningstar Australasia Pty. “The limit actually seems to be the supply of assets.”

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