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High Conviction Property Securities Fund

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

September 2022 - Monthly REPORT

Outlook on REITs for the rest of the year

SUMMARY

The A-REIT sector fell 13.6% over the month of September following more volatility in bond yields led by (1) the US Fed’s hawkish stance on interest rates, and (2) a surge in the UK government long bond yields due to persistent inflation and concerns around the Truss government’s stimulatory “mini budget”.  As a result, the Australian 10-year bond lifted 29 basis points for the month to 3.90%, again a headwind for the A-REIT sector.

The Fund performed in line with the sector, delivering a -13.5% return for September. The key contributors included our holding in Peet Ltd (PPC -1.6%), Qualitas Ltd (QAL -4.1%) and Abacus Property Group (ABP -8.5%) while our holdings in Arena REIT (ARF -19.7%) and HealthCo REIT (HCW -20.7%) detracted from relative performance.

PORTFOLIO

Top Holdings (alphabetically)

Charter Hall Group
Australia
Real Estate
Charter Hall Group invests in and develops real estate. The Company manages real estate investment funds and develops commercial, residential, and industrial properties.
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.
GPT Group
Australia
Real Estate
GPT Group is an active owner and manager of a diversified portfolio of Australian retail, office and industrial property assets. The Group's property portfolio include the MLC Centre, Australia Square, Rouse Hill Town Centre and Melbourne Central.
Lifestyle Communities
Australia
Real Estate
Lifestyle Communities Ltd Limited provides resort style housing for individuals in their fifties and older.
Shopping Centres Australasia Property Group
Australia
Real Estate
Shopping Centres Australasia Property Group is a real estate investment trust owning Woolworths Group anchored shopping centres and free standing retail assets.

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 30 Sep 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund -13.5% -25.0% -2.7% 0.6%
S&P/ASX 300 A-REIT (AUD) TR Index -13.6% -21.1% 1.5% -5.5%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The A-REIT sector fell 13.6% over the month of September following more volatility in bond yields led by (1) the US Fed’s hawkish stance on interest rates, and (2) a surge in the UK government long bond yields due to persistent inflation and concerns around the Truss government’s stimulatory “mini budget”.  As a result, the Australian 10-year bond lifted 29 basis points for the month to 3.90%, again a headwind for the A-REIT sector.

The Fund performed in line with the sector, delivering a -13.5% return for September. The key contributors included our holding in Peet Ltd (PPC -1.6%), Qualitas Ltd (QAL -4.1%) and Abacus Property Group (ABP -8.5%) while our holdings in Arena REIT (ARF -19.7%) and HealthCo REIT (HCW -20.7%) detracted from relative performance.

2022 has been a tough year for the REIT sector with rising bond yields putting pressure on the cost of capital and asset valuations. However, we believe the sector is in a good position for a re-rating based on the following reasons:

  1. An inflection point in bond yields should provide sector support
  2. Reporting season signalled strong fundamentals despite macro headwinds
  3. Based on Price/NTA and PE ratios, the sector provides good value relative to long term averages

An inflection point in bond yields, should provide sector support

Over the past few weeks, the market has been factoring in the expectation that central banks will continue with aggressive rate hikes for the foreseeable future. This has driven higher long bond yields and a global sell-off in REITs. There are now some cracks in that assumption, which suggests a slow-down in rate rises is warranted and yields may be at an inflection point, namely: (1) weaker than expected US manufacturing data, and (2) the RBA lifting the cash rate by 25 basis points vs the market’s expected 50 basis points increase.  Both of which suggest that the recent rate hikes have worked to tame inflation.

As bond yields stabilise, this will provide a tailwind for the sector which has been oversold based on implied REIT pricing, which, based on our analysis, is factoring in higher normalised long bond yields at 4.4% vs consensus at 3.7% for 2022 and 3.3% for 2023.

Reporting season signals strong fundamentals despite macro headwinds

FY22 reporting season provided further evidence of strong fundamentals despite the macro headwinds of rising interest rates and inflation. REITs that can successfully pass through the impact of inflation are better positioned in this environment, as they have pricing power or favourable lease structures, such as logistics and retail landlords.

In terms of gearing, the sector remains conservatively geared at an average level of 27%.  With the majority of A-REITs focusing on increasing hedging and extending hedging maturities, the rising interest rate headwinds facing the sector are now largely known.

Operationally, occupancies and rental collection for all sub-sectors are back at pre-pandemic levels. We expect rental growth for the logistics sector to be the strongest at 10-15% with low vacancy rates of <1% for Sydney and Melbourne. Retail REITs continue to benefit from improvements in re-leasing spreads from -5.5% to -2.8%, as well as the return of ancillary income. Office occupancy proves to be resilient, but incentives remain high at 30%-40% for most CBD markets. We remain cautious on the outlook for office due to workplace utilisation remaining low coupled with supply challenges particularly in Melbourne. For residential, presales have slowed for MPCs (master planned communities) but guidance was supported by strong price growth for apartments, embedded margins and cost containment.

Based on P/NAV and PE ratios, the sector provides good value relative to long term averages

During CY22 to date, the A-REIT sector has fallen by 28% in comparison to the broader equities market that has fallen 9%. We believe the key driver of this has been rising bond yields. As it stands, the A-REIT sector is currently trading at an average discount to June 22 book values of 20%-30% and price-to-earning ratios (P/E) of 14.2x versus 10-year averages of 16.4x.  We also note that the sector has only traded this cheaply relative to the broader market in the past 25 years during abnormal periods such as: (1) the tech bubble of the early 2000s, (2) the Global Financial Crisis (2007-2008) and (3) the onset of the COVID-19 pandemic in 2020.

The rise in the cost of capital will have an impact on valuations going forward, but we believe the current pricing, which implies that cap rates will expand (valuations to depreciate) by 100-140 basis points across the board, is too bearish . Our assumptions are for cap rates to expand by 50 basis points for office, 30 basis points for discretionary retail, and flat for industrial whilst the alternative sectors, such as healthcare and land lease communities, continue to have cap rate compression driven by structural demand.

With market uncertainty around inflation, global growth and geo-political tensions, we believe the REIT sector, with its secure earnings profile and relatively cheap valuation, presents an attractive investment for investors. We are forecasting that A-REITs will provide a total return of 10% with distribution yield of 6% and earnings growth of 4% over the next year.


PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
18
MAXIMUM DRAW DOWN
-31.4%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 0.9012
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 13.52m
  • 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.