Setting up for growth

A-REITs started 2024 with a +1.21% return in January, as weaker Australian inflation and soft employment numbers in the US further pointed to potential near-term rate cuts. In comparison, the Fund returned +0.76% over the month.

The main contributors included our investment in Qualitas Limited (QAL +5.98%) and HomeCo Daily Needs REIT (HDN +4.10%), whilst HealthCo Healthcare and Wellness REIT (HCW -7.14%) and Arena REIT (ARF -5.66%) detracted from performance.  We remain positive on HCW and ARF particularly as the ACCC inquiry into the childcare services sector was released on 29 January 2024 with minimal impact on childcare landlords.

We recently recorded an interview between Executive Director Adam Myers and Portfolio Manager Amy Pham, where they discuss how the Fund navigated the challenges of 2023 in the real estate market, highlighting the advantages of being a high-conviction fund and focusing on REITs with high-quality management and assets.

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.

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.

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.

As we head into reporting season, the outlook for REITs is a lot more supportive with signs of a peak in rates and the potential for rate cuts to occur later this year.

Based on REITs that have reported so far, the majority have re-affirmed earnings guidance for FY24.  2023 clearly was a trough in earnings with the headwinds from high cost of debt, property expenses and corporate overheads dissipating.

This is a turning point for REITs.  We are starting to see companies with solid balance sheets or access to third party capital able to execute on strategy. These groups are well placed to acquire assets at an attractive price or ramp up developments to grow earnings.

We remain positive on the logistics sector given the demand/supply dynamics, continued strong rental growth albeit off peak levels, and opportunities for further upside through a shifting focus towards data centres. We also favour large retail malls due to the resilience in earnings from lease structures with embedded rental growth despite consumer slowdown.  In residential, we favour the more affordable products such as Master Plan Communities and Land Lease Communities benefiting from structural tailwinds.  On a stock analysis, we look for companies with a strong balance sheet and resilient earnings. This is important as the sector positions itself for the next growth phase.