Income-oriented investors have always been prepared to look at the listed real estate investment trust (REIT) sector for yield, but in recent years, the attraction of surging dividend payouts from shares – particularly resources companies throwing-off rivers of cash from high commodity prices – has pushed the REITs into the background, particularly as COVID hit office, retail and tourism property hard, while simultaneously boosting industrial and logistics property.
REIT yields have also paled into comparison with the grossed-up yields that fully franked dividend-paying companies have been able to offer investors, particularly those on lower tax rates such as self-managed super fund (SMSFs), especially when these move fully into retirement phase and members commence a super income stream (or pension), and the grossed-up yield can be turbo-charged by franking credit refunds.
In this context, REITs are fighting with one hand tied behind their backs, as distributions are typically untaxed in the trusts’ hands and do not come with franking credits attached. Some of the REITs are stapled securities – where a unit in a property trust trades indissolubly with a share in a property company, and the latter may be active in property development, syndication, management and property services – thus giving rise to a small franking component. And there is often a small tax-advantaged component, arising from tax concessions, such as depreciation allowances and tax-deferred income, but this is not as effective in reducing an investor’s tax liability as fully franked dividends from shares – and in the SMSF context, does not augment the yield to the SMSF in accumulation or pension mode.
But some of the REITs are offering unfranked yields around the 8%–9% range, and while there might not be franking to make this juicier in the hands of the investor, there is attractive scope for total return if the REIT unit/share price can behave as analysts think, over the near term.
This level of projected income yield is significantly above that of the top echelon of ASX-listed REITs – the likes of Vicinity Centres, Dexus, Scentre Group – in which your yield for this financial year, at current prices, will start with a 6. The trade-off for the perception of greater safety is that analysts don’t see those stocks as having as good an upside. That’s the kind of decision that investors have to make all the time in the share market.
In that context, here are my three top REIT situations.
1. Centuria Office REIT (COF, $1.54)
12-month total return: –32.1%
Three-year total return: –13.3% a year
FY23 (June) estimated yield: 9.2% unfranked
Estimated payout ratio: 86.2%
Analysts’ consensus price target: $1.95 (Stock Doctor/Thomson Reuters, nine analysts), $2.027 (FN Arena, three analysts)
One look at Centuria Office REIT’s dismal performance over one and three years (it is also showing a total-return loss over five years) tells you what investors think of the prospects for the recovery of the office sector. COF manages a $2.3 billion portfolio of 23 assets across Australia and New Zealand, but a quirk of that portfolio is that it has no assets in either the Sydney or Melbourne CBDs. Nevertheless, COF is Australia’s largest ASX-listed pure-play office REIT.
At 30 June the portfolio was 94.7% occupied, which belies the doom and gloom in the media about work-from-home converts planning not to come back to the office. COF says that across its portfolio, it’s not only been able to retain a lot of its tenants, and increase occupancy, on the back of a “flight to quality” response from tenants, who want to get into better-quality office space than they were in pre-COVID: with the average age of its assets being around 16 years, COF says it has one of the youngest portfolios among REITs, and that is attracting tenants. Since the outbreak of COVID, COF has leased more than 120,000 square metres of space, which is about 40% of its portfolio’s net lettable area (NLA). In FY22 it leased 41,000 square metres of NLA, which is about 13% of the total portfolio NLA.
The distribution met guidance for FY22, coming in at 16.5 cents a unit – 0.1 cent better than FY21 – but the FY23 distribution guidance, at 14.1 cents a unit, was below market expectations. Still, at the current unit price of $1.54, that would represent a yield of just under 9.2% – and with analysts’ consensus price targets on COF implying upside in the vicinity of 26%–31%, that looks an attractive buying proposition.
2. Cromwell Property Group (CMW, 70 cents)
12-month total return: –5.3%
Three-year total return: –11.1% a year
FY23 (June) estimated yield: 8.6% unfranked
Estimated payout ratio: 92.6%
Analysts’ consensus price target: 99 cents (Stock Doctor/Thomson Reuters, three analysts), 92.5 cents (FN Arena, two analysts)
Cromwell is another stock that has been a dud for the best part of five years. But it now looks oversold.
CMW has a direct property investment portfolio in Australia valued at more than $3 billion, and total assets under management of $12 billion across Australia, NZ and Europe. Most of CMW’s earnings come from property rental income, but some comes from funds management.
Cromwell has struggled for most of the same reasons as COF, and more recently, has felt the impact of the Ukraine war – it owns retail property in Ukraine’s neighbour, Poland. The ongoing conditions have seen the company shelve indefinitely its plans to spin-off a $3 billion portfolio of Australian office towers into a separate, managed property trust.
This mooted divestment is part of a proposed broader transition into a “capital-light” fund manager, while holding co-investment stakes in the vehicles it manages. Becoming capital-light will entail simplifying the business and becoming more capital-efficient, through reallocating capital from non-strategic investments to new opportunities. The company has identified almost $900 million in non-core assets that it could sell, including the Polish retail assets, a sale that could be a challenge in the near future, given the geo-political risks.
In FY22, Cromwell paid a distribution of 6.5 cents a unit, down from 7 cents in FY21, and disappointed the market by not giving full-year FY23 distribution guidance. But it did say that investors could expect a distribution of 1.375 to be paid for the September 2022 quarter. If investors simply annualise this guidance, they would be expecting a full-year FY23 distribution of 5.5 cents – which would represent, at a share price of 70 cents, a full-year yield of 7.8%. But Stock Doctor/Thomson Reuters’ collation of analysts’ consensus forecasts expects a distribution a little bit better than this, at 6 cents; FN Arena’s collation is looking for 5.8 cents. That implies a prospective FY23 unfranked distribution yield of 8.3%–8.6%. This picture will become clearer over the financial year: the Cromwell board will provide distribution guidance on a quarterly basis. But with very solid upside postulated by analysts’ consensus target prices, CMW appears to be excellent value on a total-return basis.
3. Elanor Commercial Property Fund (ECF, 94 cents)
12-month total return: –6%
Three-year total return: n/a (listed December 2019)
FY23 (June) estimated yield: 10% unfranked
Estimated payout ratio: 85.9%
Analysts’ consensus price target: $1.21 (Stock Doctor/Thomson Reuters, three analysts)
Elanor Commercial Property Fund is a small office trust that owns nine commercial office properties, spread across Queensland, New South Wales, the ACT and Western Australia, with a total portfolio value of $609 million as at 30 June. The portfolio was 95.6% occupied as at 30 June 2022, with the trust saying this was significantly above the market occupancy figure, which it put at 86%, citing JLL REIS (Real Estate Intelligence Service) June 2022 figure for national CBD occupancy.
Funds from operations (FFO) per security – the equivalent of earnings per share (EPS) for REITs – was 10.94 cents in FY22, up more than 17% on FY21, and beating the company’s guidance of 10.8 cents per security. From that ECF paid a distribution of 9.4 cents a unit, down 6% on FY21.
ECF gave guidance of lifting its FFO per security to 11 cents a share, and maintaining its distribution of 9.4 cents a share, which represents a 10% unfranked yield at the current unit price of 94 cents. Again, analysts see more than enough room for unit price to growth to make ECF potentially good buying at current levels.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.