Eureka Correspondence

Sentinel's investment strategy, higher yielding A-REITs, dividend cash cows, and more.

Gauging Sentinel’s investment strategy

I was interested to read the contrasts between Rosemary’s sensible views on the risks and characteristics of unlisted property trusts versus the strategy of Sentinel Property Group expressed in Alan’s interview with Warren Ebert, Sentinel’s chief executive.

My own view is that the red flags of regional properties, short-term borrowings, short-term leases, high gearing, unlisted closed end trusts, might work just fine if Sentinel is absolutely diligent with risk management. In particular, will they sell/reduce gearing/change their business model as the property cycle responds to higher interest rates in 18-24 months’ time?

I would be very interested to know if Rosemary or Alan sees Warren Ebert’s model as sustainable or perhaps a short term opportunistic success that may need to be would down when rising bond yields reduce the attractiveness of commercial property.

Rosemary Steinfort’s response: I agree with your red flags with respect to unlisted property trusts. Also with rising interest rates likely in the next year or so, investors may seek other areas of yield outside commercial property. The problem is now all yield is expensive and more risk is being taken by investors to access a higher relative yield to term deposits and bond yields.

I think Sentinel has had a great performance and topped the performance tables for unlisted trusts for a while. But I think before investing in a listed or unlisted trust it is necessary to look at gearing, payouts, and premium/discount to NTA. See my article today, Unlisted property: solid returns, but also risk.

Higher yielding A-REITs

While High-risk signs for high-yield A-REITs is a good reminder of the current financial state of some of the higher yielding real-estate investment trusts (REITs), and those mentioned by Rosemary are well known, there are other (newer) listed and higher dividend paying REITs that may not fall into this category and the article by Rosemary should perhaps highlight these few.

Denis D’Cotta

Rosemary Steinfort’s response: You have rightly pointed out there are more A-REITs than I have mentioned that are paying a relatively higher yield (I was focusing on those in the S&P/ASX 300 A-REIT index).

There are approximately 50 A-REITs listed on the ASX – and in that list only three A-REITS meet all the factors I would consider important with respect to the level of gearing, the dividend payout ratio and the premium or discount to book value (net tangible asset values). The three that fit this criteria are Westfield Retail Trust (WRT), which has been sold down on uncertainty about the restructuring; Dexus Property (DXS), which has been going through restructuring and the acquisition of Commonwealth Property Office fund, so outlook for company has been uncertain (leading to a lower premium to NTA); and Federation Centre, which is the renamed Centro Property and is still in the process of rebranding, restructuring and acquiring properties to boost rental growth.

Analysing the dividend cash cows

Interesting numbers in Our top 10 dividend cash cows, but you might take it a step further. Most buyers don’t feed spare money into the market each year indifferent to the cycle and price – which maybe is best – as they are sucked in during the up years (like now) and out on the down years. So when they buy has a major impact forever. Putting your cash in in 2004 was very much smarter than putting the same cash in in 2007 (and maybe than leaving it in now). It would be foolhardy to assume that the next 10 years returns will be as good as the last. They could be... anything. And we know what impact quantitative easing and low interest rates have had on asset inflation since 2009, and we know that quantitative easing will go soon and the other in time, so the markets will again have to think for themselves. No times are ‘normal’, but current times are very not normal.

It would be good to see sequential annualised returns for a $10,000 investment in each of these shares in each of the last 10 years. For the episodic buyer, that gives a more revealing picture of what deliberate or inadvertent ‘timing’ will do to results. It takes decades for you to be sure that shares will outperform other assets, and that is rarely mentioned by the industry. Retirees don’t have decades, and must draw down as they go, which adds an additional problem. Initial down years in a ‘buy and hold’ strategy can be a disaster and is why the majority of the retirees assets should not be in the market, irrespective of how long they’ve held the shares and how well or badly they’ve already performed. That some retirees take it a step further and currently lever into risk assets is dangerous.

Name withheld

Retail investors missing out

As a shareholder in Tiger Resources (TGS) and Woodside Petroleum (WPL), I am feeling rather battered from their recent activities.

Tiger simply issued extra shares and flogged them off to the institutions at a discount, triggering a 12.5 % drop in the share price. The explanation for this change appeared to be that they could (see Brendon Lau’s analysis here).

Woodside’s actions were a little more complex. They agreed that Shell would sell off a huge tranche of their shares at a discount to the institutions. They then plan to compensate Shell by buying back another huge tranche from Shell at an effective premium to market price (small capital value, large dividend and helpful franking credits to cover tax on Shell’s very nice capital gains). Structurally there are benefits and their shares ‘only’ dropped 4.5%.

In both cases this amounts to a huge transfer of wealth from individual investors, such as myself, to the institutes and from the Australian taxpayer to Shell (see Woodside shareholders lose to Shell).

To add insult to injury I, and a number of others, decided that the drop in the Tiger share price was overdone and bid 32.5 cents to top up my holdings. However, at the last minute, we were gazumped by a bid of 32.75 cents. The broker that I use (Commsec) only allow bids at a multiple of 1/2 cent so there was no way that I could match this.

I will of course be showing my disapproval by voting against these actions and the remuneration reports of both organisation but I will be overwhelmed by the blessed Institutions. I just wonder why I don’t switch to the Chinese market!

Name withheld

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