Questions of the week – REITs and ANZ

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Question: In the quest for yield, the REITs have been popular. Some smaller REITS (e.g., IDR, CMA) are still paying around 7% (unfranked). How defensive are REITs really? I understand that high gearing was a problem for REITs going into the GFC but what are the main risks now?

Answer (by Paul Rickard): You are right in that during the GFC, very high gearing led to a crunch for REITs, as they weren’t able to readily refinance loans. Unit prices plunged, and they were the worst performing sector on the ASX over this period.

Post the GFC, most REITs have adopted a much more conservative approach to gearing – which now typically sits in the 25% to 35% range.

Notwithstanding what happened in the GFC, I think you can say that REITs are pretty defensive assets. In terms of risks, these are my top four:

  1. a soft economy that results in falling demand and puts pressure on rents or for higher incentives;
  2. capitalisation rates move back up – due to market forces (too low) and/or interest rates moving up;
  3. falling Australian dollar leading to reduce offshore investor interest or some forced sales of buildings; and
  4. Fund or building specific risk (i.e., major tenant risk).

Question: We have 30% of our portfolio in ANZ shares earning a 9% dividend. Should we just stay there forever or sell up at a price when we feel the share price will not go higher or retain say half of them? Any advice would be appreciated.

Answer (by Paul Rickard): I would always be a little nervous about having 30% of my portfolio in one stock.

At least in the last couple of weeks, you have done pretty well with ANZ. From consistently being the worst performing major bank stock, new CEO Shayne Elliott has junked Mike Smith’s Asian strategy, moved the bank back to being an Australasian retail and commercial bank, cut headcount and cut the dividend. ANZ is no longer the cheapest stock – it is now trading on a multiple of 12.1 times FY16 earnings, compared to 11.3 for the NAB, 13.1 for Westpac and 14.1 for CBA.

While I like what he is up to, I do think ANZ is starting to look fairly fully priced compared to the other major banks. So, yes – I would reduce, and if I was to maintain my bank exposure, switch into NAB and probably CBA.

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.

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