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High Conviction Property Securities Fund

Australia's only high conviction A-REIT fund with an ESG focus

October 2021 - Monthly REPORT

The impact of rising interest rates on AREITs

SUMMARY

The AREIT market held ground to finish the month up 0.6%, not withstanding the spike in 10 year bond yields from 1.49% to 2.09%.  In comparison the Fund returned 0.1% with key contributors including our overweight positions in Irongate Group (IAP), Charter Hall Social Infrastructure (CQE) and Peet Ltd (PPC).  Detractors included Centuria Capital (CNI), Mirvac Group (MGR) and Ingenia Group (INA).

PORTFOLIO

Top Holdings (alphabetically)

Charter Hall Group
Australia
Real Estate
Goodman Group
Australia
Real Estate
GPT Group
Australia
Real Estate
Ingenia Communities Group
Australia
Real Estate
Mirvac Group Property Trust
Australia
Real Estate

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Oct 20211
1 MTH 1 YEAR SINCE INCEPTION P.A.
High Conviction Property Securities Fund 0.1% 25.9% 20.0%
S&P/ASX 300 A-REIT (AUD) TR Index 0.6% 31.8% 5.9%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The AREIT held ground to finish the month up 0.6%, not withstanding the spike in 10 year bond yields from 1.49% to 2.09%.  In comparison the Fund returned 0.1% with key contributors including our overweight positions in Irongate Group (IAP), Charter Hall Social Infrastructure (CQE) and Peet Ltd (PPC). Detractors include Centuria Capital (CNI), Mirvac Group (MGR) and Ingenia Group (INA).

This month, Australia’s two largest economies started reopening after months of lockdown, with expectations that it could unleash a wave of consumer spending and people returning to the office. Will things be back to normal or has the pandemic created structural shifts that the new normal is here to stay?  Meanwhile, the backdrop has also changed with interest rates heading back toward where they were at the beginning of the year and concerns around cost inflation, reduced stimulus and labour shortages threatening to muddy the outlook.

With the market expecting interest rates to rise from these historically low levels, we assess below the impact this would have on AREIT’s earnings and the flow on effect on cost of capital and valuation.

From an earnings perspective, at first glance one can say that the impact of higher interest rates has minimal impact as the average gearing level for the sector is relatively low at 27%.  However, with fierce competition for quality assets, many REITs particularly the externally managed REITs, have utilised low floating rate debt to maximise the earnings accretion from acquisitions.  As a result, REITs’ earnings are now much more exposed to interest rate moves with more than 35% currently unhedged compared to 20% in the previous year.  As an example, Scentre Group (SCG) has annual rent escalations of CPI +2-3% p.a. on a majority of leases.  However, with leverage of >40% and historically low hedging levels of 55%, we see headwinds to earnings if interest rates continue to rise.

Currently, the average debt cost for the AREIT sector is 3%, compared to 4% three years ago.  The expected rise in rates would make it harder for externally managed REITs to grow through debt-funded acquisitions.  The flow on impact would be a slowing of fund manager’s AUM growth and more importantly it will highlight the REITs that are able to grow earnings through capital recycling and development compared to those purely relying on acquisitions.

On valuation, the AREIT sector has for the past 10 years benefited from falling interest rates supporting cap rate compressions.  Going forward, as rates start to rise, we see a slowing in cap rate compressions and a catch up in rental growth, particularly for favourable asset classes such as logistics.  Our valuations assume a 3.5% bond rate which is 1% higher than the market.  This provides us with a buffer in the event of further rate rises.  The average forecast distribution yield of the sector is currently 4%, providing a 195 basis point yield gap to 10 year bonds that should continue to provide support for the AREIT sector.

So how is the Fund positioned? We remain positive on the outlook for fund managers  (Charter Hall Group (CHC) and Centuria Group (CNI)) and residential developers (Cedar Woods (CWP) and Peet Ltd (PPC)), particularly in land sub-division, and we continue to increase our exposure to the alternative sector with our recent take up of the newly listed RAM Essential Services Property Fund (REP), taking our total exposure to the alternative sector to 25%.

 

PROFILE

Platform Availability

  • BT Panorama
  • Hub24
  • Macquarie Wrap
  • Mason Stevens
  • Powerwrap
  • uXchange

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
NUMBER OF STOCKS
18
BETA4
MAXIMUM DRAW DOWN
-15.8%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.3111
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 11.37m
  • STRATEGY INCEPTION DATE 11 March 2020
  • BenchmarkS&P/ASX 300 A-REIT Total Return Index

Fund Managers

Amy Pham

Portfolio Manager

Jade Ong

Investment Specialist

Description

A Property Fund focussed on capital security, income yield, and sustainable growth.

The Fund believes each security has an underlying or intrinsic value and that securities become mispriced at times relative to their value and each other.

The Fund seeks to exploit such market inefficiencies by employing an active, value based investment style to capture the underlying cashflows generated from real estate assets and/or real estate businesses.

The Fund believes that responsible investing is important to generate long term sustainable returns. Incorporating ESG factors along-side financial measures provides a complete view of the risk/return characteristics of our property investments.

The Fund is benchmark unaware. All positions are high conviction and assessed on a risk-reward basis, resulting in a concentrated portfolio of 10-20 securities.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. The Fund incepted on March 11th 2020.  Index performance calculations include a complete month’s performance for March 2020.  No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 11 March 2020.
3. Annualised standard deviation since inception.
4. Relative to S&P/ASX 300 A-REIT TotalReturn Index.
* For further information regarding fees please see the PDS available on our website.