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High Conviction Property Securities Fund

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

November 2022 - Monthly REPORT

Fund Positioning and Outlook - recovery in the REIT sector as bond yields stabilise

SUMMARY

The Fund returned 5.9% with key contributors to performance from our investments in the alternative sector including NEXTDC (NXT +18.6%), HealthCo REIT (HCW +13.8%) and Lifestyle Communities (LIC +8.7%).

AREITs returned a solid 5.8% in November as bond yields continued to trend downwards.

Inflation showed signs of moderating over the month, implying the medicine is working as the effects of the aggressive rate hike cycle kick in.

PORTFOLIO

Top Holdings (alphabetically)

Arena REIT
Australia
Real Estate
Arena REIT operates as a real estate investment trust. The Trust owns a portfolio in sectors such as childcare, healthcare, education and government tenanted facilities in Australia.
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.
HomeCo Daily Needs REIT
Australia
Real Estate
HomeCo Daily Needs REIT operates as a real estate investment trust. The Company invests in and manages portfolio of retail assets.

Sector Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 30 Nov 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund 5.9% -15.6% 2.3% 6.2%
S&P/ASX 300 A-REIT (AUD) TR Index 5.8% -12.3% 3.2% 0.1%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

As we head into the New Year, the Fund is in a strong position to take advantage of the recovery in the REIT sector as bond yields stabilise. Whilst our investments in real estate fund managers such as Charter Hall Group (CHC) and Centuria Group (CNI) were oversold during the year, both stocks have since recovered 31% and 23% respectively from their lows.

We expect both CHC and CNI to continue to grow AUM despite media reports during the month of offshore real estate managers such as Blackstone and Starwood having to limit redemptions for their BREIT and SREIT funds. Based on our discussions with AREIT fund managers, we do not see the same level of heightened risk of liquidity events and pressure on funds under management as seen overseas. This is based on several factors including differences in economic environment, fund structures and investor bases:

  • Investors in BREIT and SREIT funds appear to be mostly high net worth retail investors out of Asia, whereas capital invested with AREIT fund managers are mostly sourced from global pension funds, sovereign wealth funds and other institutional investor groups.
  • BREITs and SREITs are open-end / perpetual life funds and as such their respective managers typically provide liquidity (maximum 5% of NAV) to exiting investors on a quarterly basis. In comparison, AREIT managers have a much higher proportion of institutional investors in closed end funds where typically the domestic manager is under no obligation to provide redemption liquidity. For domestic open-end funds, liquidity windows typically occur every 3-7 years (as opposed to quarterly as for BREITs and SREITs) and initial discussions with domestic fund managers suggest they are not seeing any pressures in this space to date.

 

The Fund’s exposure to convenience retail such as Region Group (RGN) (formerly SCA Property Group), RAM Essential Services Property Fund (REP) and HomeCo Daily Needs REIT (HDN) is expected to perform well. Strong sales coupled with CPI-linked rents should result in continued strong earnings growth.  As the cost of living is starting to put pressure on household budgets in the year ahead, we favour non-discretionary malls that have the ability to leverage to online fulfillment, such as click and collect, to drive turnover rents.

In the alternative sector, the Fund now has 27% exposure to childcare, healthcare, retirement living, data centres and real estate credit. Earnings from these assets are more defensive as they are considered essential services or driven by secular trends. Cap rates in these sectors have been relatively stable during this cycle. In the land lease sector, cap rates have compressed 25 basis points driven by strong rental growth with further upside through development returns.

The Fund also favours the logistics sector and has exposure through our holdings in Goodman Group (GMG) and Centuria Industrial REIT (CIP).  We forecast cap rates will expand approximately 50 basis points but will be offset by rental growths of 20% (particularly for infill locations).

The Fund currently does not have any holdings in pure office REITs as we believe it will be the sub-sector to come under the most pressure with expected cap rate expansion of 70 basis points and no rental growth to offset it. The weak operating environment (high vacancies of 12%-15% and high incentive levels of 30%-40%) coupled with uncertainties around the work from home trend has resulted in flat rental growth for the past two years. We expect this to continue until there is price discovery between buyers and sellers in the direct and listed markets, or a reduction in supply as the cost of capital continues to rise.

As we enter into the New Year and head into the half yearly reporting season, our portfolio is focused on two key areas:

  1. defensive exposure via investments in convenience retail malls and alternative assets, and
  2. high quality growth through real estate fund managers and the logistics sector.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
17
MAXIMUM DRAW DOWN
-31.4%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.0356
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 16.04m
  • 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.