Sagicor X Fund dividend policy faces scrutiny - But Byles says it beats the market

 Marcella Scarlett, Business Reporter

THE CREATORS of Sagicor Real Estate X Fund have promised a payout of 85 per cent dividend to investors, but at least one investment house has knocked the offer, saying wealthy purchasers of the stock would in effect be giving up 15 per cent of potential returns.

Sagicor X Fund aims to use the funds raised from a float of its shares to buy units in the Sigma Real Estate unit trust fund (SRE). The units will represent X Fund's primary assets, but the company has also indicated that it would do other real estate transactions in the future.

JMMB Group says, however, that investors could get 100 per cent returns from the SRE units were they to purchase them directly from the fund manager Sagicor Sigma, which is also a subsidiary of the Sagicor Jamaica group.

Barita Investments Limited is otherwise concerned that the projected dividend yield is low.

The SRE units are currently priced at J$1.09 each, but the minimum investment is J$500 million, which puts them in reach of institutional and high net worth investors, but out of the reach of individuals.

"This means that those investors who can afford the minimum amount would give up 15 per cent of potential income as they could invest directly in the Sigma Real Estate Portfolio," said a JMMB analysis of the Sagicor X offer.

Still, the investment firm concludes that long-term investors seeking exposure to real estate may find the IPO attractive.

The Sagicor X Fund initial public offer is priced at J$5 each. The float includes 200 million shares with an option to increase the offer to 500 million shares depending on demand. The offer runs from September 23 to October 18.

Sagicor Jamaica said while it is not the norm to disclose information on the performance of an open offer, it could confirm that "we have passed the billion dollar mark and will close on October 18 as scheduled," said assistant vice-president in charge of group marketing, Ingrid Card.

not an attractive yield

Barita's analysis indicates that the dividend yield for 2013 would be approximately 4.23 per cent "despite the significant dividend payout". It cited the figure as a "negative" but did not say what would have been an attractive yield.

Richard Byles, president and CEO at Sagicor Life Jamaica and a director of Sagicor Real Estate X Fund Limited, said the yield is "in line or even better than other offerings currently on the market".

Barita also considers the projected return on equity of 6.71 per cent for the next five years as low, saying the market average is 20.9 per cent.

However, the investment company appeared to be more optimistic about the medium-term outlook for dividends, saying the dividend yield could increase to 11 per cent by 2017 if the projected success that the company is targeting is realised.

"The dividend yield over the next four years is above eight per cent and it is tax-free," said Byles.

"The stock market has been down for some time now, so show me what is on the stock market making these kinds of money and I would be happy to get in it now," he said.

play on real estate and tourism

The real-estate portfolio that the X Fund is investing in consists of 12 properties valuing J$12.5 billion - three hotels accounting for 59 per cent of the portfolio; four industrial or warehouse properties making up 15 per cent of the portfolio; four office/retail business properties; and an undeveloped property in Kingston.

Barita said that the investment is a play on the real estate and tourism sectors "which at this time are two sectors believed to be resilient in a local economy which has been significantly soft".

In its analysis, JMMB acknow-ledges that Sagicor has recognisable experience in property management and could expand in other areas of real-estate management.

But it also said investors' interest could be affected by lack of transparency in the management of the real estate properties.

"Sagicor, by way of their special rights, has 51 per cent voting rights. This also has implication for the composition of the board of directors and its independence," wrote JMMB.

"This also means Sagcior has control of the properties and can pass resolutions that do not require all shareholders participation…".

Sagicor X Fund has the power to increase capital up to US$5 billion from the current J$5 billion. There could be further dilution were Sagicor Jamaica and its subsidiary, Sagicor Pooled Investment Fund, to exercise their option to convert units into ordinary shares at J$5 per unit prior to listing, JMMB said.

Byles, however, called it a "non-issue", saying that "all companies that have a controlling shareholder could" execute similar manoeuvres.

"It is not our intention to dilute anything," he told the Financial Gleaner. "Shareholders do not have to worry … almost all, if not every company has some kind of controlling shareholder".

Sagicor Jamaica will control 80 per cent of X Fund after the IPO.

"The structure and design of the investment exposes potential investors to dilution of ownership. On the other hand, the potential semi-annual dividend payments could provide investors with additional income. The potential for price appreciation seems low given that the design of the investment seems passive in nature," JMMB concluded.

Byles said that with the recent upgrade of Jamaica's credit rating by S&P and the country meeting the first set of target under the agreement with the International Monetary Fund, realising the X Fund targets is realistic.

"It doesn't take much to turn confidence.... There is upside, there is potential in the properties," Byles said.

JMMB and Barita both declined to comment directly for this story.

"A return to growth in the Jamaican economy is likely to benefit X Fund, and the more robust the recovery the more it will benefit," Barita said in its analysis.

"The main risk is that the market punishes the stock for the fact that the underline assets of the X Fund are fairly illiquid - the fact that the company is being listed at book, means it is susceptible to a substantial haircut from the market," Barita concluded.

marcella.scarlett@gleanerjm.com