What follows will be very familiar to subscribers who read last month’s In Focus feature on Australia and its real estate market. The story for Australand Property Group (ASX: ALZ, OTC: AUAOF) hasn’t changed much since it was the first Australian real estate investment trust (A-REIT) profiled in that February article.

It remains on the comeback trail, along with its peers, and the stock chart clearly indicates it hasn’t participated in the substantial post-March 2009 global stock market rally. But Australand continues to improve operating performance while addressing balance-sheet issues, and the progress management has made in the aftermath of the real estate-led global implosion in 2008 is impressive.

Nevertheless, the 8 percent-plus yield is saying something, and that is that there remains a significant perception of serious risk to all segments of the Australian real estate market, most of it traceable to newfound concerns about the durability of China’s growth. Management is, however, better for the recent experience, with no better evidence than its commitment to getting “back to basics,” as its Managing Director Bob Johnston put it during the REIT’s recent earnings call.

Australand listed on the ASX in June 1997 and was formed into a “stapled group” in November 2003. Australian real estate investment trusts (A-REITs) are all organized as “stapled securities.” A “stapled security” is one that combines two or more securities that are generally related and bound together through a single vehicle.

Stapled securities typically consist of one trust unit and one share in the fund’s management company that can’t be traded separately. The trust holds the portfolio of assets while the related company carries out the funds management and or development opportunities.

Although the stapled security must be dealt with as a whole, the individual securities that are stapled are treated separately for tax purposes. For example, if a share in a company and a unit in a unit trust are stapled, the owner continues to include dividends from the company and trust distributions from the trust separately in their income tax return, and the share is a separate capital gains tax asset from the unit so capital gains and losses are determined separately for each asset.

It’s important to note that though these distinctions impact finances for components of the stapled group, the impact on US-based investors from an IRS perspective is nil. These securities are deemed “corporations” within the meaning of US tax law that pay “qualified” distributions.

Australand Property Group combines Australand Holdings Ltd, Australand Property Trust, Australand Property Trust No.4 and Australand Property Trust No.5. Australand Property Group trades on the ASX as a single, stapled security under the symbol ALZ. It also trades on the US over-the-counter (OTC) market under the symbol AUAOF.

The REIT, which has been developing property for more than 80 years, has three operating divisions, Commercial & Industrial, Residential and Investment Property. 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. As for key operating metrics, operating earnings per security (EPS) for the full year were AUD0.235, while the REIT distributed AUD0.215.

Recurrent earnings represented 68 percent of EBIT, which provides Australand significant ballast during rocky economic times. 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.

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. 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.

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.

The key for Australand is to continue to shore up both its operating performance and its balance sheet. But recent results suggest management has made progress and that there’s significant upside for the stock should this performance continue. And, of course, should management continue to execute on its “back to basics” approach dividend growth will come.

For now the condition of Australand’s balance sheet 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. But operating results were solid across all divisions, though higher interest costs were a burden. Discipline and execution can result in long-term savings here, as debt is retired or rolled over at lower rates.

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 (25.7 percent as of Mar. 16, 2012) 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 8.4 percent. Australand Property Group–a new addition to the AE Portfolio Conservative Holdings–is a buy under USD2.80.