The Australian property and infrastructure sectors are in for a serious bit of pressure following the shock move by roads giant, Transurban to effectively change its business model and stop borrowing to pay investors high returns.
The move, revealed in the context of an update yesterday about a $1 billion capital raising and other funding moves, will send a shockwave through the huge trust and infrastructure sector.
Transurban is raising $659 million in a placement of 120 million securities at $5.49 each with the Canadian Pension Plan, around 10% of its equity.
The company will also raise $239 million through the underwritten distribution re-investment plan for the August 2008 distribution payout and up to $100 million from a share purchase plan.
Transurban confirmed that it would pay a distribution of 29c per stapled security for the half year ended June 30, but that would be the last at that rate.
In a major shock it said that guidance for 2008-09 was being cut to a 22 cents per security distribution, significantly lower than its February estimate of 58c.
Why the cut? Because it was unsustainable to continue paying out high returns to investors from borrowings instead of better match distributions to cash flow.
It’s a decision with considerable ramifications.
Transurban securities were halted at $5.41 yesterday ahead of the news. They have already fallen around 48% from a 52 week high of $8.33 and were just 40c away from a year low of $5.01.
That’s typical of what has happened to the sector.
It’s already been pummelled this year by nervy investors with many of the leading trusts seeing the price of their listed securities down by 20% to 40%. The Allco and Babcock and Brown affiliates have been hard hit, as has the old MFS and the Centro twins.
Because of rising fears about gearing, investors have fled from heavily indebted property and infrastructure trusts, leading to a 27% drop in the value of property trusts in the ASX 200, a 15% fall in the value of utilities companies (driven by the problems at Babcock and Brown Power and AGL Energy) and a 32% fall in the value of transport companies, thanks to worries about Qantas, Virgin Blue and its shareholder, Toll Holdings, and questions over the future of former Toll affiliated, Asciano.
Macquarie Bank has seen the value of its holdings in its listed satellites eroded and this week agreed to a deal that will see Macquarie Alliance Capital taken private because no one wanted to invest in the business any more.
According to some analysts, such as UBS, property trusts are trading about 20% below their net asset values. And this could fall as the September 29 deadline approaches for all June 30 balancing trusts and companies to lodge annual results with the ASX and disclose if the carrying values for their assets are the same as a year ago, or larger (ha) or lower (more likely).
According to figures this week, investors are valuing property trusts at around $72 billion, but net asset values are $91.5 billion, so the market has an near $20 billion discount on book value.
Now that’s either a screaming buy or a sign of more problems to come with write-downs, provisions and losses, as well as lower distributions.
That’s why the Transurban announcement is so potentially shattering to the entire sector of trusts, infrastructure funds and other companies that are being run effectively as trusts, but are actually companies.
Transport group, Asciano comes to mind: its share have been falling this week, and yesterday hit an all time low of $3.32, which is lower than at the height of the concern about the group in January and February.
The shares fell 9.5% or 37c to close at $3.33. That’s less than a third of its peak of $11.64 after it was spun out of Toll Holdings midway through 2007.
Toll shares fell 37c to $6.33 yesterday, well down from their $15.54 high almost a year ago and less than 20c away from its low for the year.
Billions of dollars of assets are on the market at Allco, Centro, MFS, City Pacific and a host of other groups, but no one is buying.
Property developers and investors like the majors in Stockland and Mirvac are struggling to maintain market valuations in the face of investor concerns about debt and their exposure to the shrinking residential sectors, especially in Queensland, which is cooling rapidly, and in sluggish NSW. Stockland fell 3c to $5.80 compared to a 52 week high of $9.38 and Mirvac fell 2c to $3.18, compared to a high of $6.30.
Property companies still have grandiose ideas about developing Sydney CBD office towers for example, including Mirvac:
Yesterday’s Australian Financial Review reported that Brookfield Multiplex Group had submitted plans for a $400 million retail and office development on the old Sydney Water Board building site in George Street.
The paper said the proposal joins Dexus Property Group, Investa Property Group, Mirvac Group and Lend Lease Corp. in proposing new office towers in the Sydney CBD, despite the tightening credit standards, rising investor concerns about high debts and the slowing economy brought on by the Reserve Bank’s tougher monetary policy.
Brookfield Multiplex’s plan for the Sydney Water site near Town Hall involves the refurbishment of a heritage building and the demolition of an adjacent 24-storey office tower to make way for a 38-storey building, but like all the projects, will depend on finding new tenants before the projects go ahead.
That will take some while in the current economic and investment climate.
Many of the sick trusts, such as Centro and Allco have too much debt for the banks and other financiers to left go.
Shareholders and sm
