It’s All About Real Estate Fund Managers

The REIT sector gained 4.0% in November, significantly outperforming the broader market which returned -0.5%.  This was driven by a 40 basis point compression in the long bond yield to 1.7%, caused by global economic uncertainty and supply chain disruptions fueled by the new Omicron variant. By comparison, the Fund returned 3.2% driven by our overweight position in Charter Hall Group and underweight position to large discretionary mall REITs.

We have included a recording of our recent investor webinar below.

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

This month our focus is on our two largest positions, Goodman Group (GMG) and Charter Hall Group (CHC).  Both had substantial FY22 earnings upgrades and were the top performers for the year at 34% and 44% respectively, compared to the index at 21%.

So where to from here?

We believe there are two major tailwinds for real estate fund managers such as GMG, CHC and Centuria Group (CNI):

1. Lower-for-longer interest rate environment supports the demand for real estate assets
2. An increase in demand for alternative assets

Both Goodman and Charter Hall have strong and diverse platforms across listed, unlisted, and wholesale funds that they can tap into for capital.  For a fund manager, AUM growth is generated predominately from development pipelines and acquisitions.  From this asset base they are able to generate annuity earnings through management fees, acquisition fees, and performance fees.

GMG has the largest development program, with development work-in-progress (WIP) of over $12.7bn, generating substantial margins with yields on cost at 6.7% versus cap rates at 4%.  This development book, combined with strong revaluations and acquisitions has led GMG to grow its AUM from $62b currently to $70b by June 2022. Their ability to increase their WIP from $10b to $12.7b since FY21 indicates the level of demand for their products and provides confidence in their earnings growth going forward.

CHC has achieved an average FUM growth of 25% since 2015, with AUM currently sitting at $58bn.The main driver of FUM growth for CHC has been the ongoing sourcing and establishment of new wholesale and direct funds and partnerships across all real estate asset classes. Further cap rate compression across the platform, particularly in its logistics, long WALE and convenience retail portfolios provides additional FUM growth.  From an earnings perspective, we anticipate upside from performance fees generated from their industrial and long WALE funds post June ’21, which are expected to exceed their performance fee IRR hurdles.

Both GMG and CHC have benefited from having exposure to alternative real estate sectors such as logistics, childcare, and long WALE assets.  Increasing e-commerce penetration will continue to support long-term demand for modern logistics facilities. We expect this tailwind to continue as land scarcity and planning permit challenges in many infill markets should drive further rent growth and lower vacancies.

Alternative assets have proved to provide resilient earnings, particularly during the pandemic, as most of the assets are considered essential services.  This characteristic along with the small representation in the A-REIT market (currently at 6% of the index) leads to more capital flows, particularly as both the retail sector and office sector are out of favour with structural challenges from online retailing and the working from home thematics.

As a high conviction manager, we are benchmark unaware and hold a concentrated portfolio.  We continue to support REITs that have positive free cashflows, strong balance sheets, and a management team that can add value through development or capital recycling.