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High Conviction Property Securities Fund

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

July 2022 - Monthly REPORT

UPCOMING EVENT

What to expect from AREITs this reporting season

SUMMARY

The A-REIT sector rebounded strongly in July, up 11.8%, and outperformed the broader equities market by 5.8%.  In comparison, the Fund outperformed the benchmark by 0.8%., returning 12.6% to investors. Key contributors to performance included our overweight positions in Lifestyle Communities (LIC +24.1%), HealthCo Healthcare and Wellness REIT (HCW +25.5%), and Charter Hall Group (CHC +17.6%).

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 Jul 20221
1 MTH 1 YEAR 2 YEARS P.A. SINCE INCEPTION P.A.
High Conviction Property Securities Fund 12.6% -7.1% 10.2% 8.4%
S&P/ASX 300 A-REIT (AUD) TR Index 11.8% -1.2% 14.9% 1.5%

Swipe horizontally to see all columns

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

We expect a solid earnings season for the AREIT sector, driven by a strong recovery in retail which has been impacted by COVID; high earnings growth from the fund managers driven by strong AUM growth and performance fees; and record high settlements for residential developers benefiting from government stimulus such as the HomeBuilder grants. Combining these factors, we expect the REIT sector to generate average earnings growth of 12% for FY22.

Moving forward, with the rise in interest rates, the market will focus on 1) cost of debt; 2) asset value movements and 3) development returns.

Since the RBA embarked on a tightening cycle in May 2022, cash rates have jumped from 0.10% at the start of the year to 1.35% at the end of July.  This has meant that floating debt costs could be as high as 3.70% by 2023, which could have an impact on the earnings of REITs with higher gearing levels and low hedging profiles. As a whole, the sector’s capital position remains strong with an average gearing level of 27% (below the long-term average of 29% and well below the pre-GFC level of 45%).  However, with the uncertainty of where interest rates will land over the next few years, we have adopted a level of conservatism and prefer REITs that have a strong balance sheet with low gearing levels and are well hedged over the medium term.

So where to from here for valuations? Based on the REITs that have reported on June 2022 property valuations, asset values have lifted on average by 3.5% whilst cap rates have remained flat. Looking forward, we expect the office sector to have the largest downside risk to valuation with cap rates to expand by 50 basis points. Cap rates in the retail sector can be expected to expand by 30 basis points whilst the industrial sector is likely to remain flat. The alternative sector and convenience shopping centres with their defensive cash flows will continue to benefit from cap rate compression.

In the past few years, REITs have significantly expanded their development pipelines to generate superior earnings growth. However, rising construction costs coupled with potentially expanding cap rates, are making project feasibilities more difficult. Our preference is for development projects in the industrial sector with favourable fundamentals in-tact (low vacancy rates of <1% for Sydney and high positive rental reversions of 10%-15%) or in the alternative sector such as childcare or healthcare where demand remains high. The significant increase in the cost of debt finance will also prohibit many players from commencing projects. This will favour groups with in-house development capability and strong access to third-party capital such as Charter Hall Group (CHC), Centuria Capital Group (CNI) and Goodman Group (GMG).

On a macro basis, we see the moderation of bond yields from the peak of 4.2% to 3.27% currently, as a positive for A-REIT sector performance, which has typically been negatively correlated to long-term bond yields. Market commentators are now expecting the RBA to cut rates as early as 2023, suggesting recessionary risks have now increased. We believe REITs with relatively stable earnings and attractive valuations represent a favourable addition to a portfolio and should lead to relatively strong performance.

PROFILE

STATISTICAL DATA

PORTFOLIO SUMMARY
NUMBER OF STOCKS
17
MAXIMUM DRAW DOWN
-27.1%

FEATURES

  • APIR CODE PCL8246AU
  • REDEMPTION PRICEA$ 1.0778
  • FEES * Management Fee: 0.70%
    Performance Fee: 15%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 13.85m
  • 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.