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High Conviction Property Securities Fund

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

May 2022 - Monthly REPORT

Which AREIT sub-sector to be in with rising rates

SUMMARY

The AREIT sector was under pressure in May, down 8.7% following the RBA’s interest rate hike of 0.25% during the month.  The Fund returned -10.3%, with the weakness driven by our overweight positions in Charter Hall Group (CHC) and Centuria Group (CNI).

We recently held a Portfolio and Investment Update webinar. Financial planners may complete a short questionnaire available HERE for CPD points.

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.
Mirvac Group Property Trust
Australia
Real Estate
Mirvac Group is an integrated, diversified Australian property group comprising an investment portfolio and a development business. The Company's investment portfolio, Mirvac Property Trust, invests in and manages office, retail and industrial assets and the development business has exposure to both residential and commercial projects.
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 31 May 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund -10.3% -2.3% 10.5% 8.3%
S&P/ASX 300 A-REIT (AUD) TR Index -8.6% 4.6% 14.5% 1.5%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

AREITs have been a key beneficiary of cap rate compressions and falling interest rates in the past 10 years.  With the RBA raising rates for the first time since 2010, and a volatile and rising long bond yield of 3.3%, market sentiment towards the sector has been negatively impacted.

With this in mind, we have assessed the outlook for asset values for each of the sub-sectors.  Compared to long-run averages, cap rate spreads to real yields are elevated for retail, on par for office and below average for industrial. Thus, on the surface, industrial assets have the most downside risk – however, this does not take into account rental growth and structural tailwinds from the growth in e-commerce.

The sector we actually see with the biggest downside risk in is the office sector. The slow rebound to physical occupancy (40% of pre-COVID levels), vacancy rates of over 12% in major cities and 30% tenant incentives are placing further pressure on rents.  In addition, with the flight to quality we see an increase in capex for older assets dragging on operating income in the near term. As a result, we have factored in a 50-basis point cap rate expansion for office assets from an average of 5.0% to 5.5%.

For discretionary retail, we have factored in a lower level of cap rate expansion of 30-basis point to an average of 5.6%. This is based on better-than-expected trading performance (sales up 10% on pre-COVID levels), the ongoing roll off of retail abatements and return of ancillary income to centres.  However, some challenges remain as market rents are still down 8% for regional centres since the start of COVID.  With the increase in cost of living and diminishing consumer sentiment due to rising inflation, we continue to prefer well-run non-discretionary retail centres.

Industrial cap rates are currently at 4.4% and are now only a +360bps spread to the 10-year real bond rate vs. historical averages of between 400bps to 600bps. However, the sector has ongoing tailwinds with a positive outlook for rental growth based on continued demand and limited supply.  This has driven rental growth to record levels, which are now up ~10% year-on-year in several eastern seaboard infill markets. Whilst growth will moderate, we expect high single digit growth to remain over the next 2-3 years, offsetting any pressure from higher rates.

Based on the latest quarterly company updates, the only sectors that reported an increase in valuations (or cap rate compressions) are childcare, healthcare and non-discretionary retail.  This is due to their certainty of earnings, which continues to attract capital flows. For example, reported June 2022 preliminary valuation increases on December 2021, were +7.8% for Arena REIT, +4.1% for HomeCo Wellness REIT and +4.6% for HomeCo Daily Needs REIT.

Although rising bond yields may be a headwind to asset values, we believe alternative assets such as childcare, healthcare, seniors living and defensive retailing will continue to be relatively insulated due to their certainty of income based on demand driven by secular trends and long term stable tenancies.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
16
MAXIMUM DRAW DOWN
-19.2%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.1261
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 12.08m
  • 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. 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.