For the month of February, AREITs returned -0.4% and outperformed the broader equities market by +2.1%. In comparison, the Fund returned -0.7%. The key contributors were our exposure to GPT Group (GPT +3.5%) and RAM Essential Services Property Fund (REP +3.2%), whilst detractors include our holdings in Lifestyle Communities (LIC -13%) and Centuria Group (CNI -7%).
There was much anticipation from REIT investors going into this reporting season. It not only reveals how AREITs are coping with the sharp interest rate rises, but it is the first reporting season where the impact of COVID-related rental waivers and provisions has wound down. Pleasingly, retail, industrial, and self-storage fundamentals were strong and even some office REITs reported better performance than expected. On the other hand, residential conditions are soft, office developments are challenging, and the rising cost of debt is weighing on the sector’s earnings outlook.
Despite rising debt costs, AREITs are proving resilient with the majority re-affirming their FY23 earnings guidance, with some even upgrading, such as Goodman (GMG), National Storage (NSR), and Vicinity (VCX). The upgrades were based on strong underlying operations, although the upgrade by VCX was also partially driven by a one-off $25 million reversal of prior year waivers and provisions. On the other hand, weaker operating performance and wet weather lead to earnings downgrades from Ingenia Communities Group (INA) and Rural Funds Group (RFF).
We’re starting to see some transaction activity with REITs looking at ways to generate value. Abacus (ABP) surprised the market with a proposed spin-off of its self-storage assets into a new externally managed REIT, crystallising value from its portfolio.
Looking forward, with the risk of a further slowdown in economic activity over the near term, we continue to prefer companies with embedded rental growth structures, greater cashflow resilience, and balance sheet strength. As a result, we continue to prefer exposures to industrial, non-discretionary retail, and alternative assets. These assets are experiencing strong rental growth which can help offset the impact of rising debts on earnings, as well as any expansion in cap rates on valuations.
The industrial sector continues to benefit from strong demand translating to rental growth of +20%. We expect this to continue given constrained supply, particularly in infill locations, lack of available land for developments, and vacancies in Sydney and Melbourne at record low levels of less than 1%. We prefer groups with shorter weighted average lease terms (WALE) to capture the positive rent reversion. This includes Stockland (SGP), which has 40% of its logistics exposure expiring over the next three years, and GMG, with its strong balance sheet and a development pipeline over $10bn.
Retail sales were strong with sales growth of 16% reported by tenants, leading to better leasing deals for landlords. However, we still believe that exposures to discretionary retailers will pose some risk for landlords over CY23 as these retailers face headwinds to sales from tighter consumer budgets. We view convenience retailers such as HomeCo Daily Needs (HDN), Region Group (RGN), and REP as a more defensive play as the environment softens.
We hold Fund Managers such as Charter Hall (CHC) and (CNI) based on their attractive valuations. The rapid rise in the 10-year bond yields and cash rates have significantly slowed down transaction activities (30% decline according to Cushman & Wakefield), which manifested itself in negative performance for fund managers as it impacts their FUM. A number of REIT managers have suggested the gap between price expectations is narrowing compared to a year ago. We believe, once there is price discovery between buyers and vendors, transaction activity will pick up and fund managers with their diversified capital source and strong balance sheet will be in the best position to benefit from this.
The Fund continues to support exposures to alternative real estate assets, particularly in land lease, childcare, healthcare, and data centres. With a weaker economic outlook over the medium term, we believe alternative assets provide more sustainable earnings driven by secular trends and government assistance (underpinning rental growth). In addition, on the capital front, alternative assets are still in high demand and are underrepresented in the AREIT sector.
Portfolio Manager
Investment Specialist
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.
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.
