September, 2023
Listed real estate underperformed the broader market in September. We are disappointed to report that the Fund was down -6.6% in September, of which -0.5% was attributable to currency losses.
The strongest contributors in September were Canadian with Interrent (Apartments) and Chartwell (Healthcare) the only two investees to deliver a positive return.
Chartwell offered a positive occupancy update in September with August occupancies at 81.1%, forecast to increase +160bp to October. Canada’s 75+ population is beginning to accelerate; as they consider suitable accommodation, Chartwell greatly benefits from rising occupancies.
The 75+ population in Canada isn’t the only accelerating population; higher levels of migration has driven Canadian population growth to 2.5% annualised, inevitably leading to an increased demand for apartment accommodation, benefitting Interrent, which has an apartment portfolio largely focussed on the Greater Toronto Area.
UK Self-storage were the largest detractors, followed by Australian retail landlord Scentre Group. UK storage investee Safestore reported decent results earlier in the month, with higher revenues despite a weak UK economy. Despite this, earnings guidance for the remainder of the year wasn’t as high as the market was expecting. On top of a gloomy mood around the sector, this led to a continued sell-off for our UK storage names.
US Residential was generally an underperformer in September, as the latest data shows signs of further easing rents.
Apartment rent growth data was most muted. The Apartment List National Rent Report, a private sector rental survey reported that the nationwide median rent fell month-on-month (-0.5%) and year-on-year (-1.2%).
Apartment and single-family REITs gave some updates during the month, similarly with expectations of further easing into 2H23 as peak leasing season has passed.
Our general observations are that moderating rents represent a period consolidation after a period of outsized growth rather than any structural supply/demand imbalance. The chart below puts these recent falls into context against the strong gains across 2021 & 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/sep-2023.pdfAugust, 2023
August was a reasonable month for the Fund, which saw a return of +0.5%. This was made up of a weaker AUD adding +3.2% against a -2.8% local currency return.
The strongest contributors in August were based in Germany, with Sirius Real Estate (Industrial) and LEG Immobilien (Apartments) all enjoying a strong month.
Despite Sirius having a March balance date, markets seemed to have viewed German real estate companies reporting second quarter results rather optimistically.
With all the talk about asset values and cap rates, LEG’s second-quarter result revealed accelerating rent growth translating to EBITDA growth. This is important, as free cash generation reduces the reliance on asset sales to reduce leverage – which, in LEG’s case, isn’t much of an issue as it has no debt expiring until September 2025.
Other strong performers were STAG (US Industrial) and Chartwell (Canadian Seniors Housing), which both released positive second-quarter results and specific to Chartwell an optimistic occupancy outlook, which bodes well for prospective EPS growth.
On the other side of the ledger, Ventas (US Healthcare), Simon Property (US Malls) and Alexandria (US Life Science) lagged this month. In the case of Ventas, its price has been weak post its second-quarter result, where guidance came in lower than the markets lofty expectations. Long-term, the investment case remains intact.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/aug-2023-1.pdfJuly, 2023
July was a strong month, with the Fund up +4.2%. However, a stronger AUD detracted -0.9% from a +5.1% local currency return. July’s return adds to the positive returns in the first half, with +10.5% returns since the beginning of the year. The strongest contributor in July, as in June, was US Office landlord Empire State Realty. On top of favourable news, the company reported 2Q earnings in July with strong leasing volumes and positive cash rent spreads. ESRT’s Manhattan office occupancies continued to increase to 91.6% in June, from 88.3% a year earlier. Cash leasing spreads at 14.7% have shown an upward trend since mid2021; which coupled with rising occupancy does not suggest a market in strife, notwithstanding negative media headlines.
Other strong contributions were made by investees LEG Immobilien (German Apartments) and Unite Group (UK Student Accommodation). Listed German apartment landlords enjoyed a rally this month as investee LEG Immobilien upgraded its earnings forecast and announced better revaluations than anticipated. Unite reported firsthalf results this month, with strong numbers, a profit upgrade and a successful equity raise to fund its development pipeline and improve its credit metrics. With the bulk of US second-quarter reporting season behind us in early August, REIT reports were mostly positive, with many companies beating quarterly earnings expectations.
However, conservative outlooks have by and large been retained with management reporting positive operating outlooks, tempered by the capital market and macro environment. Residential results have been positive with earnings beats and upgrades, steady rental growth for apartment and accelerating rental growth for single-family homes. Office results have been quite positive; however, management teams are still cautious, and earnings expectations are still quite low.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/jul-2023.pdfJune, 2023
Despite the intra-month volatility, June saw the Fund up +1.7% in AUD, with a stronger AUD detracting -2.0% from a +3.7% local currency return. Halfway through the calendar year, the Fund has returned +6.1% so far.
The strongest contributors in June came from US Office landlord Empire State Realty. Empire State’s embattled listed peer, SL Green, announced a $2 billion sale of a 50% stake in 245 Park Avenue to Japanese investor Mori Trust. The pricing positively surprised the market, which was around $1,200 per square foot and the same price SL Green paid for it last September.
Other strong contributions were made by investees Ventas (US Health) and Simon Property (US Malls). Our team visited NAREIT this month – the feedback was overwhelmingly yet cautiously optimistic. Ventas is enjoying a post-COVID recovery in Seniors Housing, with strong demand and lack of new supply fuelling rising occupancy and rate combined with decreasing operating expenses. On retail, sales across the board are positive, especially for luxury. Retailers are now focused back on physical stores, with malls being more affordable today, reflected by lower occupancy costs.
On the topic of Simon Property, we went back to the 90’s in this month’s Investment Perspectives – looking at the resilience of ‘best-in-class’ mall rents during Australia’s recession “we had to have.” With more talk of a rateinduced recession in Australia, we believe that the best retail locations are critical profit centres and especially important during recessions. The result of this is earnings certainty – something sought after in an environment of collapsing cyclical earnings outlooks. Simon Property owns a portfolio of some of the best malls in the United States.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/202789262.pdfMay, 2023
Global real estate remains volatile, as some of April’s gains were lost in May. The Fund roughly matched the broader index declining -2.9% (despite a 1.5% benefit from a weaker AUD).
Despite the volatility, fears of a banking crisis, sticky inflation and uncertain earnings; calendar year to date portfolio returns have been +4.3%.
The strongest contributors to the Fund’s return in May were overwhelmingly US residential stocks which, is not surprising since most private data providers are confirming the lack of for-sale inventory is resulting in a recovery and acceleration of residential prices.
As we discussed in last month’s Investment Perspectives there appears to be a clear global trend with rising residential prices. For some, there may be a temptation to take advantage of this opportunity via listed residential developers. However, in this month’s Investment Perspectives we highlight these types of stocks can be poor proxies for the residential market.
A reminder the portfolio retains a significant allocation to residential property (standalone homes, apartments and manufactured homes) where we find a stronger long-term relationship between underlying residential prices and stock returns without the need to take on development risk.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/201380497.pdfApril, 2023
After last month’s torrent of bad headlines for the asset class, cooler heads prevailed in April which was reflected in the portfolio’s +4.9% return, more than reversing last month’s loss. A nice recovery in Euro and Sterling assisted in the +1.7% currency gain.
The best performers this month reflected the diversity of the portfolio. Ventas (US Healthcare), LEG Immobilien (German Apartments) and Invitation Homes (US Housing) all posted significant gains.
The solid recovery in our US housing exposure is not a surprise. While local discussion focuses on residential price recovery in Australia, various house price indicators suggest house prices may have bottomed in the US during the months of February and March (while rent continues to march relentlessly higher). We are also seeing nice house price gains in other markets including Canada, UK and Germany. All this despite globally higher interest rates. So, what is going on? Is FORA (fear of renting again) driving global house price growth? We dig into the issue in this month’s Investment Perspectives.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/200302372.pdfFebruary, 2023
The portfolio returned -0.1% for February against the Index return of -0.1%. Currency movements provided a benefit of +3.5%. The AUD depreciated against most currencies in a risk-off environment.
This month our top four contributors were all Storage names – Cubesmart (US), Safestore (UK), Shurgard (Europe), and Big Yellow (UK). Our Storage investees reported exceptionally strong numbers for the latest reporting period. In the US, Cubesmart’s 4th quarter earnings exceeded market expectations and their own guidance. Pleasingly, same store rental rate growth remains above 10% with very little deceleration seen. Safestore reported a very strong 1Q trading update that indicates there is no slow-down in momentum in the European Storage story. Occupancy, Same Store revenue and rate growth continue to accelerate past expectations.
On the other end, Empire State Realty (US Office), AMH (US Single-Family), and Sun Communities (US Manufactured Housing) were our laggards. Fourth quarter earnings for Empire State and Sun Communities beat market expectations and AMH’s earnings were in-line with expectations. However, two of these companies poorly performed this month on the back of weak company guidance for FY23 earnings (AMH and Sun). This was due to outsized expense growth forecast for ’23 of +8-10%+. In our view, the investment thesis remains intact given revenue growth remains solid and expense growth will normalise in the medium term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/197705473.pdfDecember, 2022
Unfortunately, the portfolio fared a similar fate to the broader market, with a -3.7% return for December. An appreciation in the Australian Dollar amounted to a currency headwind of -0.8%, which further detracted from local stock performance of -2.9%.
Single-family residential did not have a good December – our two US single-family investees Invitation Homes and American Homes 4 Rent were the two largest detractors. While supply indicators such as single-family housing starts have been in decline throughout 2022, housing inventory (that is, listings) have also dried up. As is the case in Australia, housing values in the US are declining and owners are delaying any sell decisions during periods of price weakness. While some investors focussed on NAV might read-through with a lower implied value, our investees aren’t in the business of ‘flipping’ homes – they are focussed on operating a rental business. To that end, singlefamily rents remain robust, and the underlying value proposition remains for tenants and many investors.
Our two US healthcare investees Welltower and Ventas also detracted this month, likely in response to higher interest rates. This is despite positive sentiment around rate increases in their seniors housing portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/195604580.pdfNovember, 2022
The portfolio managed to return +0.8% for the month however this somewhat masked a strong recovery in our underlying stocks which increased +4.5% before a -3.7% currency headwind.
Europe continues to drag on our performance with German residential LEG Immobilien among the worst performers. In November LEG reduced its dividend payout ratio resulting in near term selling pressure. The company also posted disappointing 2023 guidance largely based on refinancing costs which we view as being overly conservative – especially now Euro long interest rates have since rallied 60bpts. The offsetting factor is guidance on underlying rent growth in 2023 which was above consensus as CPI linked rents begin to flow through on new leases and renewals. At the other end of the spectrum our health care stocks
surged as both Welltower and Ventas posted better than expected earnings and displayed significant pricing power (rent notices) going into 2023. More on this below.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/193657645.pdfOctober, 2022
After a disappointing September, the Fund had a respite in October being up +4.5%, including a +1.1% currency tailwind driven in large part from the Euro and Sterling that each had a rally during the month.
Retail was the flavour of the month with Simon Property (US Malls), Brixmor (US Convenience retail) and Scentre (Australian Malls) leading the charge in returns. As we have previously written in Investment Perspectives: Why rising interest rates aren’t working (yet), US households are much less sensitive to interest rate movements, owing to a high level of household savings and fixed rate mortgages.
With such low levels of net debt not seen since the 1980s, rate rises are serving as an income channel for many US households. This year’s interest rate hikes have seen many households enjoy rising passive income, and with estimates of approximately 95% of US mortgages fixed on 30-year terms, at low rates, rising rates aren’t impacting demand as has happened in the prior cycles.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/192595020.pdfSeptember, 2022
It was another disappointing performance for the Fund, recording a second -6.5% decline in a row – a stronger USD saved our blushes, adding +4.8% to our performance.
The UK was not the place to be this month – with a change in Prime minister and some questionable new policies, UK stocks and currency took a beating. This significantly hurt our returns as the Fund has a meaningful exposure to this geography – not because we have any specific macro view on the UK, but because some outstanding businesses with excellent long-term prospects are located there. As was the case 6 years ago during Brexit, despite market ’noise‘ we have little reason to be concerned about our exposure.
Not surprisingly, the biggest drags on our monthly performance were from this region, including Safestore (UK Self Storage) and Unite Group (UK Student accommodation).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/191655554.pdfAugust, 2022
It was a disappointing performance for the Fund recording a -6.4% decline for the month handing back almost all of the previous month’s performance. A weaker AUD added +0.6% to the overall return. There was no specific bad news across any of our investees. As discussed last month recent results have been encouraging and August proved no different. However, from a geographic perspective, it was a bad month to have any meaningful exposure to Europe / UK as continued uncertainty around the winter energy market soured sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/190832638.pdfJuly, 2022
The Fund recorded a positive performance in July, up +6.8% despite a -1.4% drag from currency. Best performers were dominated by some of the more underappreciated sectors, including retail and office.
Scentre Group (retail), Empire State Realty Trust (office) and Brixmor (retail) were the strongest contributors in July, while Hong Kong names (Hysan, Wharf REIC) could not match the strong rebound in in US / Australian REIT prices.
After almost a year of strong relative outperformance, we continue to reduce our exposure to our Hong Kong names (Wharf REIC) in favour of some of the most sold down positions across the portfolio including residential, retail and office. The “on paper returns” for Hong Kong real estate companies are still attractive, however we believe there is less uncertainty (lower risk) to the return outlook across the US REITs at this time.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189986424.pdfJune, 2022
Fund returns followed the market down during the month with a total return of -5.2%. Our overall performance could be summarised by geography. The deep value we saw in Hong Kong last year is paying dividends with our best performance again being Hysan, and Wharf REIC. The relative performance has been so strong year to date we have taken the opportunity to reduce our exposure to this market and increase weightings in stocks that have borne the brunt of the selling this year.
At the other end of the spectrum, Europe continues to be a drag on performance with LEG Immobilien and Sirius real estate performing the worst. For investors that may prefer to compare us to the global index, we note that some of the best performing sectors over the past six months have includes the large Japanese and Hong Kong developers, as well as US casinos – sectors we exclude from our investment universe. Our focus is on “already built” real estate, with in place leases, transparent cashflows and sensible balance sheets. If a recession is to emerge, we believe the portfolio is well positioned across a number of defensive subsectors including healthcare, storage, housing, and student accommodation.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189144216.pdfMay, 2022
The fund had a disappointing month with a return of -4.7%, that included a currency loss of -0.6%. Positive contributors were few but in order; LEG Immobilon (German residential), Chartwell (Canadian Senior housing) and Unite Group (UK Student housing).
At the other end of the spectrum, Essex (US Apartments), Safestore (UK Storage) and Stag (US Industrial) dragged on returns.
Reporting season threw up no surprises with operating metrics and guidance as strong as ever and across the board. There is an obvious disconnect between the market (share price direction) and the current operational conditions.
During the month we exited one of our long-term holdings. We sold Essex Property Trust (4.1% weight) and recycled the proceeds evenly into Alexandria Equities Real Estate (Life Science Office), Equity Lifestyle & Sun Communities (Manufactured housing), American Homes for Rent & Invitation Homes (Single family) and Store Capital (Triple Net retail). All these stocks had fallen a similar amount in price yet in our opinion offer more defensive earnings. We were motivated to sell Essex because it is a multifamily.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187965103.pdfApril, 2022
In a sharp reversal from last month, the currency added +3.9% to the Fund’s total return (-3.5% in March), resulting in a relatively small loss of -0.7% for the portfolio. Despite the volatility, over the past two months the total return of the The fund has been +0.1%, with only +0.4% from currency movements.
The strongest contributors came from Hong Kong (Hysan), and our exposure to the defensive manufacturing home sector (Equity Lifestyle, Sun Communities). At the other end of the spectrum, Empire State Realty, Simon Property and LEG Immobilien dragged on returns. We expect these stocks to reverse with results coming in well ahead of expectations (Empire State), or signs results may well surprise on the upside in the near future (Simon Property).
Overall, reporting season has been solid (mainly north America), with most sectors reporting impressive rental growth, limited supply risk, and a buoyant transaction market. Private equity continues to remain active as American Campus Communities (Student accommodation), and PS Business parks (US office flex) attracted bids at healthy market premiums.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187291706.pdfMarch, 2022
Despite a -3.5% currency loss for our un-hedged strategy, the Fund managed to eke out a +0.7% return – although not enough to reverse the losses from the first quarter (which were largely attributed to currency).
Our exposure to senior housing again paid off in the month with both Ventas and Welltower contributing the largest returns. Betting on the aging demographic is one macro theme we can understand – and the share market continues to help us by inexplicably pricing these companies cheaply. None of our laggards this month are a cause of concern. LEG Immobilien (German housing) posted excellently operating performance for the quarter however, in the short term the market is pricing the company as a bond a proxy which is not great in the current environment.
Ultimately, the company’s solid earnings and dividend growth (dividends expected to increase ~10% this year) will matter more. As highlighted by the following chart, LEGs historic and expected earnings look nothing like a bond coupon.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/186139166.pdfFebruary, 2022
The Fund again struggled to perform this month posting a -4.9% total return including -2.6% detraction from weaker foreign currencies. Not unlike global equities, losses accelerated toward month end as conflict in Ukraine dominated headlines.
We would like to remind investors the Fund has zero exposure to Russia, Ukraine (either directly or indirectly) or any other emerging economy. Our largest exposure to Europe is via the UK, and much of our exposure on the continent lies to the west in the German city of Berlin. Since inception, we have been 100% invested in developed markets, and that will continue to be the case.
The fact currency worked against us during the risk off period is rare but not without precedent. We have seen these moves in the past (particularly during 2020 and the pandemic), and ultimately these dual headwinds ultimately reverse (as per 2021) resulting in very strong “catch-up” returns. While we do not know the timing of such a reversal, we remain upbeat for the prospects of our investees and their medium-term outloo.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/184807951.pdfJanuary, 2022
The Fund posted a -3.5% total return, and not unlike global equities, a late January rally sharply reduced monthly losses. The ’risk off‘ environment came with a blessing – namely a +2.6% gain in currency. The poor return this month offsets December’s +3.7%, as real estate investors grapple with two competing forces – the (perceived) negative effects of rising interest rates, and the positive earnings growth / recovery across most real estate sectors.
We think the latter will win-out, and as such we remain near fully invested as we approach the 4th quarter reporting season. After a solid contribution to 2021 returns, European self-storage was a meaningful drag on January returns. Recent company results and updates were very positive, but it seemed investors expected more. Scentre group was also a major detractor in our performance, as local investors weigh the negative sentiment from Omicron. Recent retail sales data (see below) suggest overall retail sales in Australia remain well above trend, and as such our conviction in the stock is unchanged.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/183913085.pdfDecember, 2021
As with other risk assets, the Fund enjoyed a rally into year-end, delivering a +3.7% total return, with underlying stock returns of +5.8%. Most investees performed well, with our biggest contributors for the month reflecting the diversity of the portfolio including Invitation Homes (single-family homes), Sun Communities (manufactured housing) and Brixmor (US retail). We held our position in Coresite until the final day of its takeover offer (27 December), which has now been converted to cash. Given the strong rally in share prices over the month, this decision caused a slight drag on our performance. For the 12 months to December, the Fund delivered a +37.8% return which, while pleasing, largely reflects the benefit of the general recovery in global real estate values.
Over the past 12 months our best performers included Safestore (UK Self storage), Cubesmart (US Storage) and Brixmor (US retail). As one would expect, we were frustrated by our underperformers including Unite Group (UK Student accommodation), LEG Immobilien (German Affordable housing), Hysan (Hong Kong Diversified). However, the underlying fundamentals of each investee have not changed over the year. Rather, we think that in some cases fundamentals have improved, hence our conviction in these names has only increased with the relatively lower prices they now afford.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/182558823.pdfNovember, 2021
The Fund managed to deliver a +3.6% total return in November. We wish we could claim this was a result of skill however, like global equities, it was all currency assisted (+4.5%).
We did have some good investment outcomes during the month, with sole data centre investee, Coresite, agreeing to an all-cash offer of $170/ share from American Tower. Coincidentally on the same day, peer owner/operator CyrusOne was also acquired by private equity. As we have noted in the past, when any of our investees are to be acquired, we tend to hold until the deal is closed as our position represents a near free option (almost no downside but potential for an over bidder). This may cause somewhat of a drag in an up market relative to the broader index but given our index unaware approach this is of little concern. Separately, we really do like free options.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/181479443.pdfOctober, 2021
The Fund managed to deliver a +2.1% total return for October and falling short in recovering the -4.7% loss from the previous month. However, currency did not help with a -3.3% headwind included in the stated return. Accordingly, our underlying investees performed well with local currency returns of +5.5%. Self-storage was again a meaningful contributor, while our healthcare / senior housing exposure was a meaningful drag. In retrospect the lagging performance from our senior housing investees is not a huge surprise given the current environment and their relatively higher labour expenses. As we move towards closing out the year it has become clear that businesses exposed to operating costs / wages are most likely to face earnings headwinds in the medium term. Senior housing as a sector has various levels of exposure to direct labour costs which could act as a headwind to near-term portfolio performance. On the other side of the ledger there is however a very strong revenue story with occupancies and rents recovering from post Covid lows as well as a multiyear accelerating demographic tailwind.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/180599068.pdfSeptember, 2021
September, including a +0.6% currency tailwind (underlying stock down ~5.3%). Best performers included retail landlords Scentre Group and Wharf REIC, while our recent purchase of Sirius Real Estate again meaningfully contributed. At the other end of the spectrum LEG Immobilien, Safestore and Unite Group lagged – a strange group given the recent landlord-positive German elections, and Safestore’s 3rd quarter earnings upgrade.
It’s always hard for us to identify exact reasons for short term performance and this month is no exception. It would be easy to blame the contagion effects from the Evergrande issues and the negative sentiment impact across the real estate universe (oh no, not the GFC again!). Ultimately, it is not unusual to see some pullback in performance after the Fund’s recent strong run with calendar year to date returns of +24.5%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/179655297.pdfAugust, 2021
By month end, global equities posted a +3.1% total return, slightly ahead of the local market of +2.4%.
The Fund returned +2.6% (net), again assisted by small currency gains (+0.3%). Scentre Group (Australian Retail), Safestore (European Storage), and Cubesmart (US Storage), were the strongest contributors, while Hysan (Hong Kong Diversified), Ventas (US Heath), and Empire State (US Office) were the drag.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/178706592.pdfJuly, 2021
Upgrades, upgrades, and upgrades. The current reporting season is delivering somewhat of an earnings bonanza for REITs (especially US REITs). In some sectors earnings upgrades have been +10% on already lofty expectations (Self Storage, Retail and Apartments).
The over-riding theme is the consumer sensitive sectors are “recovering well”, and from a REIT perspective, short lease duration is delivering a bigger upgrade compared to long duration (befitting from more regular mark-tomarket pricing). The Fund is well positioned in this context with a meaning exposure to residential, self-storage and senior housing. For the best part of 12 months, our unhedged strategy has suffered from currency headwinds as the Australian dollar rallied hard from its COVID lows. Yet in the past few months that headwind has turned into a tailwind, over-inflating our monthly returns. This month was no exception with a +2.2% benefit from currency.
However, we believe it is instructive to take a longer-term perspective. Over the past 12 months, the currency impact on performance has been approximately -2% yet the Fund has delivered a total net return (in AUD) of +35.6%. This ties in with our overall philosophy that it is stock selection that matters over the long run, not currency. Meanwhile, an unhedged currency exposure protects investors from the worst drawdowns during the time of crisis.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/175700375.pdfJune, 2021
The fund returned +4.8% net for the month, including a +3.0% benefit from currency movements. This brings net returns for the financial year 20/21 to +26.1% (inclusive of a -7.2% fx impact). This appears to be a solid result amidst the uncertainty of the global pandemic although we temper our enthusiasm as these numbers are inflated by the fact we are now comparing ourselves to very depressed 2020 prices and performance. As always, we measure ourselves against a +5 years’ timeframe, and ask our investors to do the same.
Despite the strong recovery in share prices over the past 12 months, we continue to believe our portfolio is well positioned to exceed out CPI + 5% total return target. The fund’s top performer this month was our US data centre investee, Coresite Realty, driven by the aforementioned corporate activity in the sector. Our US Storage and US healthcare names also contributed strongly.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/174715744.pdfMay, 2021
For the month of May, buoyed by strong operational performance across our investees, the Fund delivered a +2.7% return, almost entirely driven by local stock performance (currency only added +0.2%).
UK Storage led the way with outstanding operational results, while German residential (driven by recent corporate activity) underpinned the performance for the month. As per previous months, laggards continue to reflect the Covid defensive sectors including Life Science Office and Industrial property. Despite recent under-performance, we continue to expect these companies to comfortably exceed our long-term total return target of CPI + 5%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/172933473.pdfApril, 2021
The global real estate index returned a strong +4.9% return, while the Fund slightly lagged with a +4.7% return (that included a 1.0% currency loss).
Winners from the month in order of contribution to returns were American Homes for Rent (US Single Family), Cubesmart (US Storage) and Life Storage (US Storage). The laggards for the month were Hysan (Diversified, Hong Kong), Scentre Group (Aust, Retail) and Coresite (US, Data Centres).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/171384251.pdfMarch, 2021
Global Real Estate didn’t quite keep pace with equities (up +4.5%) and the Fund lagged the index (+1.9%). Winners from last month were a drag in March including Hysan (Hong Kong diversified), Scentre Group (Australian retail) and Wharf REIC (Hong Kong retail). No quite offsetting this was our exposure to US residential including Equity Residential, American Homes, and Essex.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/169812533.pdfFebruary, 2021
Notwithstanding the sharp increase in bond yields, the Fund performed well delivering a +4.2% total return. This month is yet another reminder that there is no strong long-term correlation between listed real estate and bond yields
Underlying constant current stock returns were up +5.3% reflecting the ongoing recovery in real estate values.
It has been a year since markets began to price in the risk of a pandemic, and over this time our returns in $A terms can be viewed as disappointing.
However, in constant currency terms, our underlying portfolio gross return is up +8.9%, which we think is a pretty good outcome given the legislative / policy headwind the sector has been asked to navigate (landlord code-of-conduct, eviction moratoriums etc), and the fact the currency headwind over the past year (-15.3%) will eventually reverse. We know with the experience of our near 7-year track record that so long as we get the stocks right, currency has little long-term impact on our ability to deliver on our medium-term CPI + 5% target.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/167979956.pdfJanuary, 2021
In a similar outcome to global markets, the Fund was also relatively flat for the month (-0.4%), supported by a +0.5% currency gain.
Safestore (European Storage), Coresite (US Data), and Mid America Apartments (US apartments) all posted strong gains. Safestore again posted very strong operating metrics during the month supporting our long term secular European storage demand thesis, and providing a nice read-through for our other storage exposures. In addition, the Fund’s retail exposure again contributed significantly.
Our exposure to German residential, triple net leasing and US healthcare detracted this month. As we head into reporting season, early indications suggest the leakage of occupancy across our senior housing exposure is accelerating during the US winter. This will continue to add pressure to short-term earnings – and probably performance. However, we firmly believe the positive long-term demographic tailwinds for the sector are unchanged.
During the month, we exited our position in Camden Property Trust, or “CPT” (US Apartments). We had re-initiated our investment in this company at the depths of the crisis (April 2020) and have been handsomely rewarded with +56% total return (in local terms). We used the proceeds to increase our exposure to existing investees, in particular US single-family housing. As a consequence, the number of investees across the Fund reduced to 26. At current pricing, we believe we have sold out of CPT at replacement cost, and into single-family houses at / near replacement cost.
When we launched the Fund in 2014, there were clear demographic tailwinds supporting the US apartment sector. The ‘echo boomers’ (aged 25-34) were a significant cohort, with a high propensity to rent apartments in urban locations and limited ability to buy. In 2014 this demographic was growing significantly. This theme worked well, however six years later, as the same cohort settle down and raise families, they’re likely to need a single-family home near schools. This demographic shift is well depicted in the following chart via Calculated Risk, who in our view are one of the best analysts on US housing and demographics.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/164945045.pdfDecember, 2020
The Fund’s underlying investees rallied into Christmas along with other risk assets, up +3.1% in local currency terms. However, the headwinds from currency delivered investors a slightly negative - 0.6% return for the month. As frustrating as the headline AUD returns may be, we remind investors that ultimately currencies mean revert, while returns accumulate. Over time, currency headwinds and tailwinds offset with stock selection being the only thing that matters.
At the investee level, again our retail exposure served investors well, with Brixmor (US retail) delivering the largest positive contribution, along with Wharf REIC (Hong Kong retail). US apartments (Essex, Mid-America) were among the performance drags along with Hysan (Hong Kong diversified).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/163381860.pdfNovember, 2020
As mentioned in previous monthly reports, we are bullish global real estate based on attractive valuations and have remained fully invested for several months now. The portfolio can be broadly characterised as being split 50/50 between the “stay at home trade” (Industrial, Storage, Data Storage, Affordable Residential) and “re-open trade” (Retail, Healthcare, Office, Coastal Apartments).
As a result of being fully invested and unafraid of owing ‘out of favour sectors’ such as retail, the portfolio managed to capture much of the rally during the month, although a stronger AUD again reduced reported returns. The Fund delivered a credible +6.5% total return in November (+10.3% in constant currency terms), although admittedly still lagged the widely used global REIT index.
On a rolling 12-month basis our total return performance remains disappointing in AUD terms, however in constant currency terms performance is down -4.5%. We view this as a credible result given the disproportionate costs the real estate industry was asked to bear during lock-down. As the vaccine is distributed and normalcy returns, these costs will abate.
Our winners for the month should come as no surprise to REIT market observers. Quintessential re-open stocks such as Brixmor Property Group (US Retail), Scentre Group (Australian Retail), and Hysan (Hong Kong Diversified) contributed significantly. Conversely stocks that performed admirably during the lockdown dragged on performance, including CubeSmart (US Self Storage), STAG Industrial (US Industrial) and Safestore (UK Self Storage).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/162199640.pdfOctober, 2020
The fund eked out a small return for the month (+0.8%), which was again assisted by a weaker Australian dollar that added +1.8% to the total return.
The “K” shaped recovery across the global real estate asset class persisted in October as the winners continued to win, and the laggards again failed to gain market support.
This was evident in the Fund, where self-storage (Europe and US) and industrial continued to perform well. Pleasingly, our long-suffering Hong Kong names contributed positively (Hysan), as the region appears to have done well to contain the virus. Conversely, urban residential (Equity Residential) and retail property were a drag.
Despite the difficult trading environment, we remain constructive on retail as an asset class. While some global names continue to struggle and are in the midst of repairing balance sheets (all of which we have avoided), we believe there is a role for ‘best in class’ retail. This month’s Investment Perspectives explores the economics of shopping centres and unpacks the persistent myths that may lead to ‘once in a cycle’ investment opportunities.
File:ticker: BFL0020AU
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release_schedule: Monthly
fund_features:
Quay Global Real Estate Fund invests in a portfolio of real estate securities listed on stock exchanges around the world. It is relatively concentrated and currency unhedged, with a conviction based approach. The strategy focuses on delivering investors real total returns, and invests through the cycle while also taking advantage of counter-cyclical opportunities.
- Aims to provide investors with a total return (before fees and expenses) of the Australian Consumer Price Index (CPI) + 5% per annum measured over 5 plus years.
- The Fund typically holds 20-40 securities.
- Suits to both income and growth investors (five years plus).
- High risk/return investment.
manager_contact_details: Array
asset_class: Property and Infrastructure
asset_category: Global Listed Property
peer_benchmark: Property - Global Listed Property Index
broad_market_index: Dvlp Global Real Estate
structure: Managed Fund