When the Facebook IPO finally goes off, real estate prices in certain prices of Northern California–if they haven’t already done so–will start to climb, as newly minted b- and millionaires chase their Silicon Valley bungalows.

My goal here is not to answer the question, Is Australia in a housing bubble? My goal is to identify investment opportunities and pitfalls. Using Facebook illustrates the point that at certain times certain places benefit from particular demand for services–and in Australia’s case, stuff such as iron ore, coal and natural gas–that creates a local “wealth effect.”

This may be the case in Australia; it may not. But our evaluation will begin with facts and underlying fundamentals, the key ones of which remain unemployment and income, which remain strong in Australia. The Land Down Under, as it has since the beginning of the 21st century is enjoying rapidly rising wealth because of its abundant resources and its proximity to China, India and other key Asian markets.

The US housing bust may have been inevitable because of the unsound foundation into which foreign capital seeking a solid return was poured. But in Australia, as in Canada, lending standards were never allowed to deteriorate to the degree they slipped in the US. So in support of its natural gifts Australia has remained relatively responsible.

That’s not to say all is well. Overall debt levels relative to assets and income for Australians have risen to heights that would make even American and Canadians blush. But the major question remains the general trend of the domestic economy.

Employment remains in good health, inflation remains subdued and the Reserve Bank of Australia (RBA), which recently held back on an interest-rate cut because conditions seemed to be turning without additional monetary stimulus, still has considerable move to act in case Greece or some other bogey blows a hole in the emerging rally.

The RBA’s actions during its previous two meeting had sufficient impact that it can now hold fire until it may be absolutely necessary; interest rates for borrowers have declined to close to medium-term averages. Governor Glenn Stevens has resisted calls from hurting retailers and other “pro-consumer” factions to ease their pain, a prudence that would have suited a certain maestro-level central banker in the early 2000s. This is all water under the bridge.

As of mid-February the US is showing signs of establishing a definite growth trend, while China is behaving according to how policymakers there hoped in late 2011, with plenty of room for more reserve-requirement easing at its banks, for example. Asia is slowing, but commodity prices have remained at elevated levels. It’s impossible at this point to predict what will finally happen, but it looks more and more like Greece may not bring down the global economy in a dramatic heap but through endless negotiating, back-sliding and aggravating it to death. Threats from abroad also include tension between Israel and Iran.

But in Australia growth is coming back “close to trend,” according to Mr. Stevens. Inflation is moderating, credit growth has been modest and housing prices actually slowed but showed signs of stabilizing at the end of 2011.

It’s an interesting question, made titillating by what happened in the US from 2006 to 2008. But the Australian housing situation, while it bears some resemblance, is a lot different from the US a couple years ago.

Most importantly, any potential catalysts for a cataclysmic downward spiral are well known. Prices are high in Australia and may in fact adjust to longer-term trends. But it’s also indisputable that Australia occupies a new place of prominence in the global economy, and that rising asset prices simply reflect the increasing wealth of Australians.

A-REITs

Australian real estate investment trusts (A-REITs) fell and were seemingly left behind after Lehman Brothers’ portfolio of real estate assets brought the firm down in September 2008. Although global equity indexes have rebounded to post new highs in recent weeks, The S&P/ASX A-REIT Index is still trading at about one-third of its pre-Lehman peak.

Australand Property Group (ASX: ALZ, OTC: AUAOF) listed on the ASX in June 1997 and was formed into a “stapled group” in November 2003. Australand Property Group is a stapled security that combines Australand Holdings Ltd, Australand Property Trust, Australand Property Trust No.4 and Australand Property Trust No.5. Australand trades on the ASX as a single stapled security.

Australand, which has been developing property for more than 80 years, has three operating divisions, Commercial & Industrial, Residential and Investment Property.

As of Dec. 31, 2011, the Investment Property division had a total portfolio value of AUD2.2 billion with 70 properties, including three properties under development.

Its current market cap is approximately AUD1.51 billion.

The top security holder is Singapore based property group CapitaLand Ltd (Singapore: CAPL, OTC: CLLDF, ADR: CLLDY), which owns approximately 59 percent of the issued capital.

In early February Australand reported 2011 operating profit growth of 6 percent to AUD135.4 million, while earnings per share of AUD0.235, beating a consensus of analysts’ forecasts. On Dec. 19, 2011, management reported a 5 percent dividend increase for its final dividend for the year. (Australand’s fiscal year aligns with the calendar year.)

Statutory net profit after tax (NPAT) was AUD140.6 million, a 15 percent decline from the prior corresponding period because of investment property revaluation gains, impairment of development assets and unrealized losses on derivative financial instruments.

Sixty percent to 70 percent weighting to recurring earnings provides Australand significant ballast during rocky economic times. The key for Australand is shoring up both is operating performance and its balance sheet. For now the condition of the latter prevents it from participating aggressively in the market for distressed assets that’s still pretty lively more than two and a half years after the signal Lehman Brothers event.

Results were solid across all divisions, though higher interest costs were a burden. But discipline and execution can result in long-term savings here, as debt is retired or rolled over at lower rates.

Investment Property EBIT (earnings before interest and tax) was AUD165.5 million, excluding revaluation gains of AUD59.4 million. Comparable rental growth, meanwhile, was approximately 3.3 percent. Occupancy as of Dec. 31, 2011, was 99.3 percent, while the weighted average duration to lease expiration was 5.8 years.

Development EBIT increased by 6 percent on the prior corresponding period, as Commercial & Industrial EBIT was AUD29.1 million and Residential EBIT was AUD76.1 million. C&I completed 13 industrial projects (six held internally) with a combined end-value of approximately AUD300 million. The division also established a logistics joint venture with the Government Investment Corporation of Singapore (GIC), a sovereign wealth fund, or SWF, targeting total investment of AUD450 million. Australand’s stake in the JV is 19.9 percent.

CIC is a high-quality capital partner that helps Australand to boost its stock of cash-flow-generating assets, even as it deals with its own balance-sheet constraints.

Residential sales trends improved in the second half of 2011, and the division delivered a 15 percent increase in gross lot sales for the year. Much of this was from impaired stock, however, which means volume was higher but pricing was weaker. As this stock runs off Australand will realize better prices for its existing stock.

In 2011 Australand successfully implemented a plan make its debt portfolio fully unsecured. This included the issue of USD170 million of guaranteed senior notes into the US private rlacement market in May 2011 as well as the establishment of a AUD675 million syndicated bank facility in September 2011. Both transactions extended Australand’s debt maturity profile and reduced costs of borrowing. The A-REIT has no maturities in calendar 2012. There is AUD548 million available in cash and undrawn bank facilities.

Management remains cautious in its outlook for 2012. The forecast for earnings growth was positive, but management wouldn’t put a number on it.

The level of “gearing,” or total debt-to-total assets, at 33 percent and Australand’s existing capital commitments effectively prevent it from buying back shares, and though earnings are growing and the A-REIT has partnered effectively to generate new-project growth, distribution growth will be along the lines of the modest 5 percent increase from 2010 to 2011. Management, however, provided fiscal 2012 distribution guidance of AUD0.215 per unit, which is flat with 2011.

At the same time Australand’s earnings have a very low base from which to stage a recovery, and a recovery is playing out. This should be recognized by the market.

The stock trades at a substantial discount (24 percent) to its AUD3.46 net tangible asset value. Closing the discount means improving returns on projects in its active divisions and continuing to strengthen its balance sheet.

The A-REIT is currently yielding 8.2 percent. Australand Property Group is a buy under USD2.65.

Stockland (ASX: SGP, OTC: STKAF) consists of an Office division, with a portfolio of 24 properties valued at AUD1.9 billion as of Dec. 31, 2011, an Industrial portfolio of 14 properties incorporating over one million square meters of building area valued at AUD1 billion and a Retail portfolio with 41 shopping center valued at AUD4.8 billion. Stockland’s properties accommodate more than 2,600 tenants and generate in excess of AUD5.4 billion in annual retail sales.

The stock has been a solid performer since AE made its debut in Sept. 26, 2011, posting a total return of 31.7 percent. It’s now well past our buy-under target of USD3.

As the December 2011 In Focus–The Australian Consumer and Picking Apart a Shopworn Sector–retail has been difficult Down Under.

Stockland’s fiscal 2012 first-half results, reported Feb. 9, confirmed what several high-profile shops reported before Christmas.

Stockland is prepared for these challenging conditions, as Managing Director Matthew Quinn noted during the A-REIT’s earnings conference call this week that “it’s not a question of whether conditions are going to be challenging. It’s a question of how you respond.”

Stockland is also a top three retirement-living provider in Australia, with 7,769 established units across six states. Its portfolio includes a short- to medium-term development pipeline of more than 3,627units.

The key to Stockland, however, is the Residential unit. Stockland, Australia’s largest residential property developer, holds 91,000 lots in master planned and mixed-use communities spread around growth areas all over the Land Down Under. Projects on the books comprise total end-value of approximately AUD24.5 billion as of Dec. 31, 2011. Its apartments account for end-market value of approximately AUD200 million.

Underpinning Stockland’s strategy to cope with difficult market conditions is an emphasis on affordable housing.

Stockland reported an after-tax operating profit of AUD350.8 million, down from AUD380.3 million in the prior corresponding period. Statutory net profit after tax (NPAT) dropped 28 percent because of an AUD85 million loss booked on hedging instruments because of the high Australian dollar and low interest rates.

Mr. Quinn noted that buyer inquiries are rising and the number of deposits had climbed to 401 in January from an 18-month low of 297 in July 2011.

Although 40 percent of buyers, up from 20 to 30 percent, were first-home buyers, this is not evidence of a broad recovery. Stockland is using tools at its disposal, including offering lots on its books at big discounts, to attract what are traditionally the first movers in a housing recovery. Stockland is now offering “affordable housing” packages priced below AUD350,000.

Mr. Quinn reaffirmed full-year guidance for earnings, which in his estimation will skew to the second half of the year as economic activity picks up. Distribution guidance is AUD0.24 per security, split evenly between an interim and final payments.

A previously announced buyback program will continue to boost the share price and will result in a favorable earnings per share number when the full fiscal-year report comes due.

But the retail and residential trends are worrying, particularly when you consider the run the stock has made since Sept. 26.

Stockland Property Group remains a buy on dips to USD3.

Westfield Group Ltd (ASX: WDC, OTC: WEFIF) is scheduled to report full-year 2011 earnings on Feb. 15. The stock is about 12 percent above our current buy-under target of USD8.

Westfield Group is Australia’s largest A-REIT with a market capitalization approaching AUD20 billion. It has interests in and operates one of the world’s largest shopping center portfolios, which comprises 124 regional shopping centers in Australia, New Zealand, the US, the UK and Brazil valued in excess of USD59 billion. It houses approximately 25,000 retailers in more than10.5 million square meters of retail space.

Westfield manages all aspects of shopping center development, from design and construction through leasing, management and marketing.

As the Australian retail sector has entered difficult times Westfield Group’s US portfolio has provided a solid balance. Its US shopping center portfolio encompasses approximately 63 million square feet of retail space in 12 states, which it leases to nearly 9,000 specialty retailers. Westfield runs malls in Northern California, Chicago, southern Florida, Los Angeles, New Jersey, New York, San Diego and suburban Washington, DC.

In a third-quarter update provided to the market in November 2011 Westfield Group management noted that “operations continued to achieve solid performances with income growth in all markets.” The A-REIT at that time was on track to meet earnings and distribution guidance.

The high-profile Stratford City project adjacent to the site of the London 2012 Olympics was delivered on time and under budget during the third quarter, with 95 percent of it leased at opening. Stratford City is setting traffic records for a Westfield Group facility.

It also  reached an in principle on the USD1.3 billion joint venture that will run the retail premises at the World Trade Center in New York and announced the sale of a half share interest in Cairns Central, Queensland, for AUD261 million at a cap rate of 5.2 percent, representing a AUD35 million, or 16 percent, premium to book value.

Management confirmed its full-year 2011 forecast for funds from operations of between AUD0.64 and AUD0.65 per security, a distribution per security of AUD0.484 and operational segment earnings of AUD0.746 per security.

The secret to Westfield Group’s success is the ability to charge tenants more rent because its malls boast consistently higher foot traffic and higher retail expendiure. For every AUD100 spent in a specialty store, for example, Westfield Group takes a AUD15 cut. The question is about the durability of this growth model. Problems with Australian retail are unlikely to last forever, and the company is well diversified globally. For now, however, the main issue is price. Westfield Group, which is currently yielding 5.7 percent, would be a buy on a pullback below USD8. Westfield Group trades as an American Depositary Receipt (ADR) on the US over-the-counter market under the symbol WFGPY; it’s worth two ASX-listed shares.

Westfield Retail Trust’s (ASX: WRT, OTC: WTSRF) principal investment is a joint venture with Westfield Group and other third parties in a shopping center portfolio that includes 54 shopping centers in Australia and New Zealand. It’s the largest domestic-focused A-REIT, with assets of about AUD12 billion. It’s a virtual pure play on the Australian dollar as well as the Australian consumer.

During its third-quarter 2011 update management noted comparable specialty sales growth of 1.1 percent in Australia and 0.7 percent in New Zealand for the nine-month period ended  Sept. 30, 2011, which includes a decline of 1.4 percent in Australia and flat sales in New Zealand for the three months to Sept. 30. Westfield Retail’s portfolio was 99.5 percent leased at the end of third quarter.

The A-REIT refinanced wtih AUD1.27 billion bilateral bank facilities maturing between

2014 and 2017. Average 2012 cost for the refinancing is anticipated to be approximately 5.8 percent. More than AUD1.5 billion of current developments remain on schedule, with the Westfield Sydney project due for completion in April 2012. Management has also identified AUD1.3 billion worth of new opportunities for development over the next five to seven years.

The full-year 2011 distributable earnings forecast is AUD0.183 per security, while management plans to distribute AUD0.165 per security, in line guidance initially offered in November 2010. Westfield Retail Trust, with a current yield of 6.9 percent, is a buy under USD2.60.

A-REIT Additions

We’re initiating coverage of three Australian REITs this month, Dexus Property Group (ASX: DXS, OTC: DXSPF), Goodman Group (ASX: GMG, OTC: GMGSF) and Mirvac Property Group (ASX: MGR, OTC: MRVGF).

Dexus, which reports fiscal 2012 first-half results Feb. 15, has two areas of operation, a AUD7.5 billion direct property portfolio focused on owning, managing and developing office and industrial properties in Australia and the US and a AUD6.2 billion third-party investment management business focused on office, industrial and retail properties. Occupancy for the group was 97 percent as of Sept. 30, 2011.

As part of its third-quarter market update management forecast funds from operations growth of 3.4 percent for fiscal 2012 and distribution growth of 3.3 percent. We’re initiating coverage of Dexus Property Group with a hold rating.

Goodman Group owns, develops and manages warehouses, large scale logistics facilities, business parks and offices. It also offers a range of investment property funds. The business has business has made steady improvement over the past three years, boosting its development pipeline to AUD2 billion on solid growth in every period since June 2009.

The balance sheet is strong, with total debt-to-total assets of 23 percent and liquidity of AUD1.1 billion with an average debt expiration 5.5 years out. Goodman also has relationships with deep-pocketed capital partners who continue to support existing and new funds. A solid A-REIT, Goodman Group is added to How They Rate coverage as a hold.

Mirvac’s AUD7.5 billion portfolio includes residential and commercial assets; management targets 80 percent of net operating profit after tax from its Investment Division, which includes commercial asserts, and 20 percent from its residential-focused Development Division.

Mrivac grew operating profit 30 percent in the year ended Jun. 30, 2011. Earnings per stapled security were AUD0.105, toward the upper end of guidance, while distributions for the full year totaled AUD0.082 per stapled security, up from AUD0.08 for fiscal 2010. As of Jun. 30, 2011, Mirvac’s “gearing”–or total debt-to-total assets ratio–was 26.3 percent. Management will report fiscal 2012 first-half results on Feb. 21. Mirvac Group is new to How They Rate coverage as a hold.