Addressing the elephant in the room

This reporting season was one of the strongest A-REITs have delivered since Covid, driven by Goodman Group (GMG) delivering 28% EPS growth on 1H23 and retail REITs’ operational earnings proving to be more resilient than expected.  As a result, the sector was up +4.75% in February, outperforming the broader equities market by +3.8%.

In comparison, the Fund returned +6.70% achieving an outperformance of +1.95% over the benchmark. 

This brings the return of the Fund over the last 12 months to +19.19% compared to the benchmark of +15.10%.

Stocks that contributed to the Fund’s outperformance for the month included investments in NextDC (NXT +25.89%) and Ingenia Group (INA +9.19%).

Top Holdings (alphabetically)

Goodman Group

Australia

Real Estate

Goodman Group is an integrated industrial property group. The Group has operations in Australia, New Zealand, UK, Asia and Europe. Goodman's activities include property investment, funds management, property development and property services. The Group's property portfolio includes business parks, industrial estates, office parks and warehouse/distribution centers.

Ingenia Communities Group

Australia

Real Estate

Ingenia Communities Group engages in managing and developing a portfolio of retirement and lifestyle communities. It operates through the following segments: Lifestyle Development, Lifestyle Rental, Ingenia Gardens, Ingenia Holidays; Fuel, Food & Beverage Services, and Corporate and Other. The Lifestyle Development segment comprises development and sale of lifestyle homes. The Lifestyle Development segment refers to long-term accommodation within lifestyle and rental communities. The Ingenia Gardens is involved in rental villages. The Ingenia Holidays segment is composed of tourism and rental accommodation within holiday parks. The Fuel, Food & Beverage Services segment is associated with the Group's investment in service station and food & beverage operations adjoined to Ingenia Holiday communities. The Corporate and Other segment relates to the Group's remaining assets and operating activities. The company was founded on November 22, 2003, and is headquartered in Sydney, Australia.

National Storage REIT

Australia

Real Estate

National Storage REIT engages in providing self-storage and tailoring self-storage solutions to residential and commercial customers. It offers spans self-storage, business storage, records management, climate-controlled wine storage, vehicle storage, vehicle and trailer hire, packaging, insurance and other value-added services. The company was founded in December 2013 and is headquartered in Brisbane, Australia.

Scentre Group

Australia

Real Estate

Scentre Group Limited owns and operates pre-eminent living centre. The Company specializes in the management, development, construction, leasing, and retail solutions. Scentre Group serves customers in Australia.

Stockland

Australia

Real Estate

Stockland is a diversified Australian property group. The Group develops and manages Retail centers, Residential Communities and Retirement Living assets with a focus on regional centers and outer metropolitan. Stockland also owns a portfolio of Office and Industrial assets.

Goodman Group has gone from strength to strength as it upgraded FY24 earnings guidance and unveiled its data centre development pipeline. The Group’s secured data centre powerbank increased from 3.7GW to 4GW with a build out value of $50-$60bn, providing strong earnings visibility over the medium term.  The inclusion into the FTSE EPRA NAREIT Index also contributed to a 22% return YTD.

Retail REITs, particularly large retail malls, reported strong operational metrics with average re-leasing spreads of +3.9% (strongest in a decade), close to full occupancy and strong double digit sales growth.  This translated to multi-year low occupancy cost (rent/sales) of 16% versus long term average of 17%-19%, supporting further opportunity to drive rental growth.

With Covid, inflation and interest rate headwinds behind us, we expect FY24 to be the trough for earnings and for the A-REIT sector to deliver strong earnings growth going forward. We believe the recovery in the sector will be earnings led rather than based on valuations, as transaction volumes remain stagnant whilst cost of capital remains high.

So, are we close to the trough in asset values? REITs devalued their portfolios for the third consecutive period from the June 2022 peak in pricing.  Office assets were written down 14% over the past 18 months with cap rates increasing by an average of 70 basis points to 5.75%.  In comparison,  industrial asset values were down 2.2% with cap rates at 5.27% and retail assets down 14% from their peak with cap rates at 5.39%.  If we compare this to the listed market, the sector is currently trading at an average discount to NTA of 14% for passive REITs with some office REITs still trading at 30% to 40% discount to NTA.  The ability to close this valuation gap depends on several factors such as gearing levels, capital structures and specific asset class concerns impacting cashflows.

As valuations, particularly for office assets, remain uncertain our focus on cashflow and balance sheet strength provides the portfolio with greater earnings visibility and sustainable growth.  We remain cautious about the office sector given weak demand and increasing near term supply.  Our preference is for retail REITs and alternative assets such as data centres, healthcare, childcare and manufactured housing.