Listed property sector covers its tracks

I've recently been exploring the listed property sector for bargains armed with a list of desirable attributes. The shortlist of criteria include a strong balance sheet, high quality property with a diversified tenant base and disciplined management with a track record of adding long-term value.

In an industry notorious for booms and busts, successful property investment requires patience. Those who prepare for tough times often make a fortune preying on desperate sellers when the cycle swings down.

Without Westfield, the depleted ranks of disciplined, humble and contrite managers in the listed property sector wouldn't be able to conquer Daydream Island. It's somewhat surprising given the number of property moguls that feature at or near the top of Australia's rich list, such as shopping centre developers John Gandel and Frank Lowy to name just two.

But what's particularly vexing is that the vast majority of managers responsible for destroying billions of dollars of securityholder capital are still in charge. Though they had plenty of company, let's follow the paths of Steven Sewell and Adrian Taylor.

Landed on their feet

Steven Sewell is chief executive officer of Charter Hall Retail REIT, which was Macquarie CountryWide until property funds manager Charter Hall Group acquired Macquarie Group's listed property management business. His colleague, Adrian Taylor, manages the Charter Hall Office REIT, which used to be Macquarie Office Trust.

Following disastrous debt-fuelled acquisition binges overseas, the security prices of the retail and office trusts have collapsed 74% and 85% respectively from their highs. That's not necessarily clear, however, as both trusts have recently covered their tracks with security consolidations. For example, Charter Hall Retail REIT has recently consolidated its securities on a five for one basis, which in turn resulted in a fivefold increase in the price.

Though management provides plenty of justification, the move to consolidate the number of securities on issue is purely cosmetic. Nothing reminds investors and managers of the catastrophic amount of value destroyed quite like a measly security price.

Unlike securityholders, though, Sewell and Taylor landed on their feet when Charter Hall offered to keep them on board. But before we shake our collective heads in dismay, let's consider things from their viewpoint.

Who was pulling the strings?

In July 2009, we estimated that Macquarie Group had milked around $76m of fees (paid in cash and securities) from Macquarie CountryWide since 2005 (clearly the amount would be worth much less at current prices). Imagine how difficult it would've been for Sewell to resist opportunities overseas when securityholders, including major stakeholder Macquarie Group, were prepared to support the risky strategy. And if Sewell had shunned the idea, would he have been shown the door?

And what of the board, which is supposed to protect the interests of securityholders? Most board members in the listed property sector are still collecting their annual dues despite failing securityholders miserably.

Perhaps institutional investors are also to blame. Why did they risk people's retirement savings on such risky strategies? Why didn't they exercise their voting power at annual meetings to cut management and the board loose?

Predictably irrational

I've just finished reading Predictably Irrational, by behavioural economist Dan Ariely. Following the GFC, Ariely explains the frustration of US citizens who trusted finance professionals to manage their investments, retirement portfolios, the companies they work for and the general economy.

According to Ariely, part of the reason why the public feels so let down is that, in the aftermath of the GFC, many citizens still feel none the wiser about what or who was to blame. Was it predatory lenders, people who should never have taken on loans they couldn't afford, or the greedy investment bankers that sold mortgage backed securities? Or was it regulators and central bankers who failed to see the problems that led to the collapse of the global financial system?

Making things worse was the fact that many public officials then failed to carry out the remedies that they had promised. To top it off, financial institutions that were saved with the public purse have continued to pay obscene salaries and bonuses. It is little wonder trust has been lost and the public feels disillusioned.

Smaller scale

In the listed property trust sector, we have a similar situation on a much smaller scale. Some of the company logos might've changed but the individuals running the show haven't. It's difficult to get excited about a sector that boasts so many managers that squandered so much money in lemming-like fashion. That and current valuations are good reasons to tread carefully.

Ariely also explained an experiment called the 'Trust Game', which led to an interesting finding. The part of the brain that lights up when we exact revenge (the striatum) is associated with pleasure. Perhaps this isn't surprising; 'revenge is sweet' so the saying goes. But what was surprising was the irrational lengths that humans are often prepared to go to in order to exact revenge.

While aggrieved securityholders would surely like to see those responsible for their losses suffer, do you think Charter Hall was wise to keep Sewell and Taylor on in order to help unwind the foreign 'growth strategy'? Or should they have fallen on their swords, like former GPT Group boss Nic Lyons, who wasted billions on an ill-timed European funds management joint venture?

Does more need to be done to protect securityholders? For example, should institutional investors be doing more to protect their investors by exercising their voting power? If you'd like to weigh in on these issues or raise others (including any thoughts on Ariely's book), please leave a comment below.

[Disclosure: Staff own shares in Westfield and Macquarie Group, but not the author, Nathan Bell].