Question 1: To what extent are Australian REITs a hedge against inflation? Are there any REITs that you feel should do particularly well in an inflationary environment?
Answer: Prima facie, you could make the case that they are a hedge against inflation in that most rental agreements have annual increases built-in. Typically, these are in the range of 2.5% to 4.0%. This means that the REIT’s operating income increases each year.
However, if inflation leads to higher interest rates (and bond rates), then capitalisation rates tend to rise. Capitalisation rates, which are used to value the REIT, work like discount rates. The present value of future rental income streams is reduced when the cap rate is higher. REITs are often referred to as “bond proxy” stocks. Also, many REITs are geared – so in the long term, they will pay a higher interest expense.
I would be very wary of REITs with high exposure to CBD offices – I don’t feel the new “work from home” trend that has played out is reflected in reported office rents.
Potentially, look at logistics/manufacturing/long term convenience style REITs such as Charter HallL long WALE REIT (CLW). This all said I am not a huge fan of the sector.
Question 2: South 32 has been a strong performer over the last 6 months. Do you believe this stock is a buy?
Answer: I have a bias against South32 (S32) because I always think of it as “the assets BHP didn’t want to own”. Since the demerger, it has proved itself to be a very well-run mining company, but like all miners, it depends on the prices of the commodities it mines.
While it is moving into copper, aluminium/alumina, manganese, zinc, metallurgical coal and nickel are the main drivers of profitability.
According to the analysts, the consensus target price is $6.05 (range of $5.50 to $6.90), about 31.5% higher than the last ASX price of $4.60.
Question 3: I hold BHP shares. Is it wise to buy more BHP shares to pick up the in-specie dividend of Woodside (WPL) shares?
Answer: I think you will find that the merger of BHP’s petroleum assets with Woodside is largely priced into the respective share prices.
I would buy BHP if you like BHP. I bought some earlier this week – I think you want to be at least “market weight” on this stock.
If you want to know more about the merger, and what shareholders need to do, you can read my article here. [1]
Question 4: What is the record date to own BHP shares, in order to receive Woodside (WPL) shares?
Answer: 24 May is the last date you can buy BHP shares (on the ASX) to receive the entitlement to the Woodside shares.
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