August, 2023
Key Contributors
AGL Energy (AGL, underweight) – energy retailer AGL underperformed during the month following the release of its FY23 result. Whilst the result itself was strong, consensus expectations appear to have now caught up with the stronger short-term earnings outlook driven by higher wholesale electricity prices. The company now has a clear long-term plan to transition away from carbon intensive coal generation, however the result highlighted that the speed of transition will be slow and there is considerable uncertainty as to the ultimate earnings base.
NEXTDC (NXT, overweight) – Data centre operator NEXTDC continued to perform strongly during the month after announcing another large step-up in contracted capacity. NXT has signed 25MW of capacity mainly in its M2 (Melbourne) data centre. This brings NXT to a 60MW (70%) increase in contracted capacity in the last three months, highlighting a step change in demand for data centre capacity and the company’s market leading capability.
Charter Hall Long WALE REIT (CLW, underweight) – the real estate company CLW underperformed during the period following the release of FY23 result. Owing to rising cost of debt and valuation de-valuations, the company reported a decline in operating earnings and a statutory loss for FY23. FY24 earnings and dividend guidance declined -7.1% with further rebasing risk from higher debt cost, asset sales and lower payout ratio.
Key Detractors
Goodman Group (GMG, underweight) – industrial real estate manager outperformed following the release of FY23 solid result. Supporting the result was an upbeat assessment of future upside from Goodman’s exposure to land with the capacity to develop out into data centres. Additionally, Goodman flagged the potential for some degree of vertical integration further into data centre operations. This update detracted attention from some of the underlying trends of the business, which have started to slow. While we continue to regard GMG as the global leader in industrial ownership, development and management, we view the upside as priced at current valuation, and remain underweight.
Chorus (CNU, overweight) – the regulated telecommunications utility underperformed during the month after guiding to FY24 earnings 3% below expectations and higher than expected capex. The market extrapolated this as a reduction to the long term cash flow generation potential of the business, however we feel these issues are more relevant to FY24 only.
Mirvac Group (MGR, underweight) – our underweight position in MGR detracted value over the month. Mirvac released its full-year result for FY23, delivering an operating profit of $580m, representing 14.7 cents per stapled security which was in line with revised guidance provided in April 2023. Notwithstanding this in-line update, the company is demonstrating good delivery on its Built-to-rent ambitions, as well as building out its apartment development business into what could be more supportive conditions in CY2024/25, which were the likely drivers of solid share price returns for the month. Within the residential development space, our preference today is with MGR’s peer Stockland, SGP
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund_Aug-2023.pdfJuly, 2023
Key Contributors
Aurizon (AZJ, underweight) – the rail freight operator underperformed after releasing a trading update at its investor day which saw earnings expectations lowered by 4% for FY23 and 5% for FY24. Aurizon faces difficulties in transitioning its business model away from coal haulage and we remain concerned that a move back into intermodal haulage will fail to generate sustainable long-term returns on capital.
Vicinity (VCX, overweight) – Australia's second largest shopping centre owner outperformed during the month despite no major news flow during the period. At a macro level, lower-than-expected inflation reported in the month suggests a peaking of the interest rate cycle, with positive follow-on implications for the Retail sub-sector. Our overweight position continues to be supported by VCX’s asset mix, with over half its asset base exposed to more advantaged segments of retailing (i.e. luxury, DFO outlets and recovering CBD centres), more resilient in-place leases with high occupancy and fewer holdovers. Further, VCX has a strong balance sheet (gearing 25.7% as at Dec-2022) and attractive valuation, with the stock trading at 0.80-times net asset backing and offering a dividend yield above 6%.
Dexus Industrial REIT (DXI, overweight) – the industrial owner outperformed during the period despite no major news flow. That said, industry data continues to be supportive for the industrial and logistics outlook, which makes up 90%+ of DXI's asset base. In our view, DXI has an appealing mix of industrial assets at this point in the cycle and is well-placed to capture upward market rents upon lease expiry into what remain tight industrial markets. Importantly, DXI’s balance sheet has recently been enhanced through proactive asset sales at values close to book value, setting the trust up well to navigate the period ahead. The valuation is attractive, with the stock trading at 0.80-times net asset backing and offering a dividend yield above 5.5%.
Key Detractors
AGL Energy (AGL, underweight) – the electricity generator and energy retailer outperformed during the period as the market became increasingly comfortable with its near-term earnings outlook, supported by higher wholesale electricity prices. The improved earnings power of the business – confirmed by the company during June with its release of FY23 and FY24 earnings upgrades – will assist AGL in funding its capitalintensive transition away from its high margin, carbon intensive electricity coal generation portfolio.
Port of Napier (NPH, overweight) – the port owner and operator underperformed during the period despite the positive reintroduction of earnings guidance for the full year. FY23 has been heavily impacted by Cyclone Gabrielle in February, however we view this event as being one-off in nature and expect to see a strong earnings recovery in FY24.
Hotel Property Investments (HPI, overweight) – the hotelowning REIT underperformed over the period, with limited company news flow. HPI has attractive leases in-place across its pub assets – with a 10.3 year weighted average lease tenure, 71% of leases referenced to inflation and with its largest tenant being QVC, a Coles joint venture. We expect these assets to perform well through the environment ahead, and the stock remains undervalued in our view (-16% below last stated net asset value, offering a 5.5% dividend yield).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jul-2023.pdfJune, 2023
Key Contributors
HMC Capital (HMC, overweight) – the diversified real estate fund manager outperformed in the period following the recent acquisition – and associated equity raise – of a portfolio of 11 Healthscope anchored healthcare assets. We are attracted to the outlook for the real estate asset mix underpinning HMC’s funds-growth (i.e. hospitals, large-format retail), the company’s operational leverage – the business confirmed in the period it’s expectation of growing to $10bn of funds under management by the end of CY23 – and the attractive relative valuation compared to peer real estate funds management groups including Charter Hall and Centuria.
NEXTDC (NXT, overweight) – following the announcement of the data centre operator’s largest ever individual contract in April and subsequent regional expansion into Malaysia and New Zealand, NXT continued to outperform as the market’s conviction in Artificial Intelligence (AI) applications as a driver of demand growth grew. Most notably, global leading specialist chip maker Nvidia’s commentary around AI driven demand growth supported previous comments made by NXT management.
APA Group (APA, underweight) – the gas transmission pipeline network owner underperformed during the period on limited news flow. Whilst a clearer strategy is emerging under the new CEO, we remain underweight the company given its difficult starting point in approaching the energy transition.
Key Detractors
AGL Energy (AGL, underweight) – the electricity generator and energy retailer outperformed during the period as the market became increasingly comfortable with its near-term earnings outlook, supported by higher wholesale electricity costs. The improved earnings power of the business – confirmed by the company during June with its release of FY23 and FY24 earnings upgrades – will assist AGL in funding its capitalintensive transition away from its high margin, carbon intensive electricity generation.
Aurizon (AZJ, underweight) – our underweight position in Aurizon was a source of underperformance for the period. AZJ outperformed during the quarter from depressed levels following multiple downgrades to FY23 earnings due predominantly to weather interruptions impacting coal haulage volumes. FY24 is shaping up to be a stronger period for earnings as coal haulage volumes recover, Network earnings step up with higher regulated returns and the full period impact of the bulk central acquisition.
Port of Napier (NPH, overweight) – the port owner and operator underperformed during the period after reducing its earnings guidance following Cyclone Gabrielle in February. We view this event as being one-off in nature and expect to see a strong earnings recovery in FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jun-2023.pdfMay, 2023
Key Contributors
HMC Capital (HMC, overweight) – the diversified real estate fund manager outperformed in the period following the recent acquisition – and associated equity raise – of a portfolio of 11 Healthscope anchored healthcare assets. We like the outlook for the real estate asset mix underpinning HMC’s funds-growth (i.e. hospitals, large-format retail), the operational leverage – the business is expected to approach $10bn of funds under management by the end of CY23 – and the attractive relative valuation compared to peer real estate funds management groups including Charter Hall and Centuria.
NEXTDC (NXT, overweight) – following the announcement of its largest ever individual contract in the previous month, the data centre provider continued to outperform as the market’s conviction in Artificial Intelligence (AI) applications as a driver of demand growth grew. Most notably, global leading specialist chip maker Nvidia’s commentary around AI driven demand growth supported previous comments made by NXT management.
Key Detractors
AGL Energy (AGL, underweight) – electricity generator and energy retailer outperformed during the month as the market became increasingly comfortable with its near-term earnings outlook, supported by higher wholesale electricity costs. The improved earnings power of the business will assist AGL in funding its capital-intensive transition away from its high margin carbon intensive electricity generation.
Vicinity (VCX, overweight) – our overweight in the domestic owning shopping mall REIT detracted from performance in May. While the company is tracking well in this second half of FY23 (as per March-quarter trading update), the share price has more recently come under some pressure following increased retailer outlook concerns. This follows the weakening consumer outlook, following recent RBA cash rate hikes to 3.85%, which we expect will continue to pressure the consumer wallet. We believe these concerns are factored into the share price, trading at 0.83 times net asset backing, offering 6.2% dividend yield.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-May-2023.pdfApril, 2023
Key Contributors
APA Group (APA, underweight) – the gas transmission pipeline network owner underperformed during the month where the major incremental news flow was APA missing out on being a preferred counterparty on a renewable energy zone transmission build in NSW. While a clearer strategy is emerging under the new CEO, we remain underweight the stock given the company is at a difficult starting point in approaching the energy transition.
Mirvac (MGR, overweight) – the diversified property group outperformed over the period supported by a March-quarter trading update which re-based investor expectations for FY23, particularly for the residential development division (lot settlement expectations now 2,200 from 2,500 for the 12- months ending 30 June 2023). This increased certainty, coupled with progress around progressing third party capital partners across the business, assisted to drive the improved share price. We remain overweight MGR reflecting its exposure to recovering residential conditions, and its quality set of income producing trust assets.
Key Detractors
Stockland (SGP, underweight) – Australia’s largest land subdivision business, which typically sells approximately 6,000 land lots annually, outperformed over the period which included a trading update reiterating FY23 earnings guidance. Notwithstanding ongoing softness in residential demand for land lots, investors took a more optimistic view to look through current conditions, with some belief that residential conditions will begin to meaningfully improve in the latter part of CY23 as expectations of interest rate cuts into CY24 continue to build. With ongoing elevated shorter-term residential earnings risk, and the stock trading now on fuller valuation metrics (14.2 times forward earnings and offering a 5.8% dividend yield), we retain an underweight position and maintain a preference for peer Mirvac insofar as residential exposure is concerned.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Apr-2023.pdfMarch, 2023
Key Contributors
APA Group (APA, underweight) – the gas transmission pipeline network owner underperformed during the quarter in which it announced the appointment of its prior CFO, Adam Watson, as the company’s new CEO and reported a result largely in line with expectations. Whilst a clearer strategy is emerging under the new CEO, we remain underweight the stock given the company is at a difficult starting point in approaching the energy transition.
Aurizon (AZJ, underweight) – the freight rail transport company underperformed during the quarter, reporting weaker than expected earnings that were heavily impacted by weather related disruptions. The earnings weakness is also anticipated to carry into the second half of the financial year. The portfolio retains an underweight position, reflecting the difficulties it faces in transitioning its business model away from coal haulage and the associated capital intensity of this process.
Key Detractors
Stockland (SGP, underweight) – Australia’s largest land subdivision business, that typically sells approximately 6,000 land lots annually, outperformed over the period. Notwithstanding ongoing softness in residential demand for land lots, investors took a more optimistic view to look through current conditions, with some belief that residential conditions will begin to improve in the latter part of CY23 as expectations of interest rate cuts into CY24 begin to build. With elevated shorter-term earnings risk, and the stock trading now on fuller valuation metrics of 12.9-times forward earnings and offering a 6.4% dividend yield, we retain an underweight position. We maintain a preference for peer Mirvac insofar as residential exposure is concerned.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Mar-2023.pdfFebruary, 2023
Portfolio review
Key Contributors
Aurizon (AZJ, underweight) – the rail freight operator underperformed during the month after reporting weaker than expected earnings that were heavily impacted by weather related disruptions. The earnings weakness is also anticipated to carry into the second half of the financial year. The portfolio retains an underweight position reflecting the difficulties the company faces in transitioning its business model away from coal haulage, and the associated capital intensity of doing so.
AGL Energy (AGL, underweight) – the Australian energy company underperformed during the month following the release of an earnings result which was below expectations, although we suspect the weakness is largely confined to the current period. Following a tumultuous two years, AGL continues to face significant uncertainties in its outlook, the primary of which is how to protect its earnings base and fund investment in new generation assets as its highly profitable coal generation fleet is gradually retired over the next decade.
Key Detractors
Port of Napier (NPH, overweight) – the port operator underperformed during the month following disruption to it operations from Cyclone Gabriel, although we note no major damage to the port was incurred. We continue to maintain an overweight position with the improvement in global supply chains and shipping reliability positive for NPH and the resumption of cruise line activity, although likely below pre COVID levels, will add high incremental margin revenues.
Ingenia Communities (INA, overweight) – the lifestyle and holiday communities operator fell following an earnings update that highlighted weaker operating conditions than first anticipated by the company. INA now assumes longer construction timeframes and slower settlements as a result of weakening residential conditions. While the balance sheet is sufficiently capitalised to support the operational weakness, the downgrade does highlight the vulnerability in the business model, and the position size has been adjusted accordingly.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Feb-2023.pdfJanuary, 2023
The custom Infrastructure, Utilities and A-REITs Accumulation Index gained +5.7% for the month, taking its 12-month return to +3.4%. The broader ASX300 mirrored, gaining +6.3% for the month, as did global indices (MSCI World Index +7.1%). All A-REIT sub-sectors recorded positive performance during the month, however there was significant performance divergence at the sub-sector and stock level. The Industrial sub-sector returned +14.5%, Diversified +8.5%, Office returned +5.7%, Residential +3.4% and Retail +4.4%. Key Outperforming A-REITs were Unibail (URW, +17.9%), Goodman Group (GMG, +15.0%) and Charter Hall (CHC, +14.9%). Key underperforming A-REITs were largely at the smaller end and included Arena REIT (ARF, -2.6%), Hotel Property Investment (HPI, -1.4%) and Region Group (RGN, -0.4%).
Key Contributors
APA Group (APA, underweight) – the gas pipeline operator underperformed during the month on limited news flow outside the appointment of Adam Watson, the company’s prior CFO, as its new chief executive. We remain underweight the company given its difficult starting point in approaching the energy transition. In our view, APA’s initiatives to shift its business model towards electrification will prove insufficient.
AGL Energy (AGL, underweight) – the energy company underperformed during the month despite an upgrade from competitor Origin Energy in their Energy Markets division. Following a tumultuous two years, AGL continues to face significant uncertainties in its outlook. The company faces significant challenges protecting its earnings base and fund investment in new generation assets as its highly profitable coal generation fleet is gradually retired over the next decade.
Key Detractors
Goodman Group (GMG, underweight) – our underweight position in the industrial property developer detracted from portfolio returns as fund managers such as GMG rallied strongly in January in-line with the large movement (lower) in bond yields. Property fund managers typically act as the longer duration cohort. Results from global peers released during the period also supported aspects of the global logistics outlook (positive rental reversions). We shifted underweight in the industrial property developer in late 2022 to reflect our expectation of slower earnings growth for the business, driven by the implications of the cap rate cycle turning higher for industrial assets and development activity and returns slowing from peak levels. While we believe GMG remains well placed to continue to grow earnings well above sector peers (FY23 EPS guidance is currently for +11% y/y, conservative in our view), we have recalibrated our expectations given an elevated valuation (21 times 12-months forward earnings) and modest 1.5% dividend yield.
December, 2022
Key Contributors
Hotel Property Investments (HPI, overweight) – the overweight contributed strongly to portfolio returns as HPI rallied following expectations of potential M&A activity with 360 Capital building rapidly a 13.8% stake in the Trust in the period. REIT investors are familiar with 360 Capital’s strategy and their past investment approaches in the REIT space which have at times led or contributed to unlocking greater value from Real Estate Trusts (Irongate REIT a recent example). Trading at 0.84 times last stated NTA and offering a 5.5% dividend yield, we remain overweight HPI.
Key Detractors
Origin Energy (ORG, overweight) – underperformance was driven by our initial underweight position prior to the energy company disclosing a takeover approach from Brookfield and EIG. The bid at $9.00 per share, a 55% premium to the predisclosure share price, values the company at an enterprise value of $18.4b. Talks had been ongoing since August and the indicative approach at $9.00 has been recommended by the Board, should the bid become binding. We view $9.00 as a fair price for Origin’s privileged energy assets and retail position, noting that the deal will be subject to FIRB and ACCC approval, with the latter subject to a public review.
PEXA Group (PXA, overweight) – the electronic conveyancing company underperformed during the period as two sentiment issues weighed on the stock. Firstly, the anticipated slowdown in house sale transaction volumes is materialising, as demonstrated by lower-than-expected listing volumes reported by both REA Group (REA) and Domain (DHG). While lower transaction volumes will see earnings decline from peak levels, this does not meaningfully impact PXA’s valuation given the long-term structural growth opportunity. Secondly, the demerger of LNK’s 44.2% stake in PEXA has created a modest overhang on the stock, however we view the company’s now open register as a long term positive.
Charter Hall Group (CHC, underweight) – the portfolio underweight contributed to returns, with increased uncertainty around the group’s earnings trajectory as the commercial real estate valuation cycle turns down. These concerns are driven by expectations of lower equity flows into existing unlisted funds – wholesale and retail – as commercial valuation declines accelerate into CY23. Additionally, almost 40% of CHC’s total FUM resides in the office sub-sector, which is likely to see the largest headwinds (income growth, valuation declines). Notwithstanding an already de-rated P/E of approximately 14 times (20% discount to the 5-year average) we don’t believe these headwinds have been fully factored into earnings expectations.
November, 2022
Key Contributors:
National Storage REIT (NSR, underweight) – our underweight position added value over the month as the stock gave up some of its strong relative YTD return. While there was no material new news flow from the company, we did observe some pull back in operating metrics for US self-storage companies which likely dragged on NSR’s performance by association. Most notably, Public Storage in the US reported Sept-quarter occupancy that was down 2.5% over the past 12- months.
NEXTDC (NXT, overweight) – the data centre operator outperformed the market during the month in which they reiterated guidance and gave positive qualitative commentary around the sales outlook for FY23. We believe the high recurring nature of NXT’s revenues, its infrastructure like characteristics and tangible asset base are attractive. NXT has been excessively discounted and we see no diminution to its growth trajectory. NXT trades on 21.3 times FY24 EV/EBITDA, which compares favourably to its more mature global data centre peers.
Scentre Group (SCG, underweight) – our underweight contributed to portfolio returns over the month, as investors within the REIT space shifted away from the higher geared names in anticipation of potential asset valuation weakness into 2023. With effective gearing of approximately 40%, SCG in this respect has more vulnerability than peers. With the company trading on more full valuation metrics relative to its retail peers, (SCG 0.90 times NTA, 5.4% dividend yield) we remain underweight.
Key Detractors:
Origin Energy (ORG, overweight) – the Australian energy company disclosed a takeover approach from Brookfield and EIG at $9.00 per share, a 55% premium to the pre-bid share price and valuing the company at an enterprise value of $18.4b. Talks had been ongoing since August and the indicative approach at $9.00 would be recommended by the Board bid becomes binding. We view the $9.00 as a fair price for Origin’s privileged energy assets and retail position, noting that the deal will be subject to FIRB and ACCC approval, with the latter subject to a public review.
Chorus (CNU, overweight) – CNU underperformed the rising index during the month but has outperformed overall through the year as the build out of its fibre network comes to an end. Investors are increasingly appreciating the regulated utility’s strong free cash flow generation, low balance sheet leverage and strong line of sight on regulatory revenues.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Nov-2022.pdfOctober, 2022
The Custom Infrastructure, Utilities and A-REITs Accumulation Index increased 8.85% during the month, rebounding from a weak prior month and paring its 12-month losses to 4.87%. In comparison, the broader S&P/ASX 300 Index returned 6.0% in October and, globally, the MSCI World Index returned 7.1%. The strength in October across the sector was broad based, with REITs +9.9%, Utilities +7.2% and Infrastructure +7.3%. Small-Mid cap REITs saw the largest appreciation over the month with names like Arena (ARF, +18.0%), National Storage (NSR, +17.0%) and Centuria Industrial (CIP, +17.0%) all strongly outperforming.
The Australian Real Assets portfolio largely kept pace with the strong index move, increasing 8.5% during October. Regulated telecommunications infrastructure provider Chorus (CNU, +15.5%) was the biggest contributor during the month, while Data Centre owner Next DC (NXT, -5.7%) was the key drag on portfolio performance.
Key Contributors
Chorus (CNU, overweight) – the regulated utility outperformed during the month as the build out of its fibre network comes to an end and investors increasingly appreciate the strong free cash flow generation, low balance sheet leverage and strong line of sight on regulatory revenues. Based on current market metrics, CNU would earn a 100bp higher regulatory return in the next regulatory period from July 2024, providing further upside to the medium-term dividend yield.
Key Detractors
NEXTDC (NXT, overweight) – the data centre operator underperformed the market during the month on limited news flow. We believe the high recurring nature of NXT’s revenues, its infrastructure like characteristics and tangible asset base are attractive. NXT has been excessively discounted and we see no diminution to its growth trajectory. NXT trades on 20.1 times FY2024 EV/EBITDA, which compares favorably to its more mature global peers.
September, 2022
Australian Real Assets declined during the September 2022 quarter, with all sectors experiencing negative returns. The Custom Infrastructure, Utilities and A-REITs Accumulation Index returned -9.39% during the quarter, taking its 12-month return to -13.55%. In comparison, the broader S&P/ASX 300 Index returned 0.45% for the quarter and, globally, the MSCI World Index returned -15.70%.
Portfolio review
Key Contributors:
Chorus (CNU, overweight) – the regulated utility outperformed during the period following another upgrade to its distribution guidance at its August result and the announcement of a buyback. Operationally the business is performing well with 30% of new plans now at the unregulated pricing speed 1Gbps or higher (vs 23% of the back book). Based on current market metrics, CNU would earn a 100bp higher regulatory return in the next regulatory period from July 2024, providing further upside to the FY24 dividend yield of 6% into the medium term.
APA Group (APA, underweight) – the gas pipeline operator underperformed in the period in which it announced its CEO would be departing, formally stepped away from its North American strategy and an inline result. We remain underweight the company on the grounds that APA’s initiatives to shift its business model towards electrification won’t be sufficient. We expect it to be dwarfed by the discount increasingly applied to its gas pipeline business, particularly as planned government policies accelerate the shift to zero emissions sources. As a result, we do not see its valuation (at a 12-month EV/EBITDA of 13.5 times) as sufficiently compelling when compared to large cap infrastructure alternatives.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Sept-2022.pdfAugust, 2022
The Custom Infrastructure, Utilities and A-REITs Accumulation Index returned -3.0% for the month, taking its 12-month return to -1.1%. In comparison, the broader S&P/ASX 300 Accumulation Index gained 1.2% for the month and global indices were negative (MSCI World Index -3.4%).
Key Contributors:
AGL Energy (AGL, underweight) – the utilities company underperformed during the period given as it reported a soft result given plant reliability issues in the half and uncertain outlook given the wholesale changes in management underway. We remain underweight AGL. Whilst acknowledging the potential for corporate activity, we feel any upside from this is likely to be modest in the context of the substantial risks AGL faces in transitioning away from its highly profitable but carbon intensive coal generation fleet. With the demerger plans now forgone and much of the executive team and Board exiting the business, we await a meaningful strategy update to assess AGL’s path forward.
Stockland (SGP, underweight) – the diversified REIT’s FY22 result released in August highlighted a challenging backdrop for its residential development business, as inquiry rates drop, land lot prices begin to fall, and costs remain elevated. Notwithstanding the stock offering an attractive dividend yield of 7.0% and trading at a 16% discount to last stated asset backing (NTA), we continue to see superior risk adjusted returns in a combination of passive Trusts (GPT, VCX) and MGR for residential exposure.
Event Hospitality (EVT, overweight) – the hospitality provider outperformed following the release of the company’s results during the period, with its diversified asset base (cinemas, hotels and ski field) continuing to experience a recovery in its visitation and improving pricing power. With the prosect for well in excess of 100% growth in earnings from FY22 levels as operating conditions normalise, we continue to maintain an overweight position.
Key Detractors
Scentre Group (SCG, underweight) – the shopping mall REIT outperformed following the release of its first half accounts. The strong rebound reflects ongoing improvement in operating metrics (visitations, occupancy), high levels of CPI linkages in specialty leases and robust underlying asset valuations. While the stock trades at 0.80 times NTA and offers a 5.6% dividend yield, we continue to see superior risk-adjusted returns in peer retail owners such as Vicinity Centres (VCX) and Bunnings Trust (BWP).
Charter Hall Group (CHC, underweight) – the fund manager REIT outperformed over the month, partially reversing recent underperformance reflecting broader concerns around higher real yields and the prospect for lower FUM growth as the commercial real estate valuation cycle moderates. The company’s FY22 revealed a strong start to FY23 from a transaction perspective. However, we remain underweight based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the longer term as the cap rate compression cycle reverses. As CHC’s growth rate slows from impressive double-digit levels, we expect pressure on the earnings multiple will constrain share price performance, and maintain a preference for Goodman Group (GMG) at this time.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Aug-2022.pdfJuly, 2022
Key Contributor:
APA Group (APA, underweight) – the gas pipeline operator underperformed in the period on limited news flow. We remain underweight the company on the grounds that APA’s initiatives to shift its business model towards electrification will not be sufficient. We expect it to be dwarfed by the discount increasingly applied to its gas pipeline business, particularly as planned government policies accelerate the shift to zero emissions sources. As a result, we do not see its valuation (at a 12-month EV/EBITDA of 13.5 times) as sufficiently compelling when compared to large cap infrastructure alternatives.
Key Detractor:
Charter Hall Group (CHC, underweight) – the fund manager REIT outperformed over the month, reversing prior months of significant underperformance as growth related REITs such as CHC suffered amid concerns around higher real yields and the prospect for lower FUM growth as the commercial real estate valuation cycle moderates. Thus, outperformance over July can be partially attributed to the macro (moderating expectations of interest rate increases) and positive stock specific news flow with Charter Hall's Prime Office Fund (CPOF) confirming the 50% acquisition of the Southern Cross Towers precinct from Blackstone and Brookfield for approximately $1bn in July. We remain underweight the stock based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the medium term as the cap rate compression cycle reverses. As the growth rate of the business slows from impressive doubledigit levels, we expect the multiple to contract, putting pressure on the share price outlook. Within the real estate fund manager space, our preference is with Goodman Group (GMG).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jul-2022.pdfJune, 2022
Key Contributors
Atlas Arteria (ALX, overweight) – the toll road operator outperformed due to its transparent inflation hedge and, moreover, as IFM’s global infrastructure fund took a 14.96% stake in the company, causing speculation of a possible takeover bid. We maintain an overweight position based on ALX’s strong liquidity and balance sheet position, discounted valuation and exposure to traffic recovery in Europe and the US. We see a path towards value creation for ALX through concession extensions at APRR achieved as a means of funding expansion projects and settling the Dulles Greenway tolling regime.
Charter Hall Group (CHC, underweight) – the fund manager REIT underperformed amid concerns around higher real yields and the prospect for lower FUM growth as the commercial real estate valuation cycle moderates. We remain underweight the stock based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the medium term as the cap rate compression cycle slows. As the growth rate of the business slows from impressive double-digit levels, we expect the multiple to contract, likely putting pressure on the share price outlook. Within the real estate fund manager space, our preference is with Goodman Group (GMG).
Key Detractors
APA Group (APA, underweight) – the gas pipeline operator outperformed in the period after hosting an investor day. Management highlighted its inflation-linked revenues and opportunities in the energy transition, particularly given the scale of investment required into variable renewable energy (VRE) and transmission. We remain underweight the company on the grounds that APA’s initiatives to shift its business model towards electrification won’t be sufficient. We expect it to be dwarfed by the discount increasingly applied to its gas pipeline business, particularly as planned government policies accelerate the shift to zero emissions sources. As a result, we no longer see its valuation (at a 12-month EV/EBITDA of 12.3 times) as sufficiently compelling when compared to large cap infrastructure alternatives.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jun-2022.pdfMay, 2022
Key Contributors
Charter Hall Group (CHC, underweight) – the fund manager REIT underperformed amid concerns around higher real yields and the prospect for lower FUM growth as the commercial real estate valuation cycle moderates. We remain underweight the stock based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the medium term as the cap rate compression cycle slows. As the growth rate of the business slows from impressive double-digit levels, we expect the multiple to contract, putting pressure on the share price outlook. Within the real estate fund manager space, our preference is with Goodman Group (GMG).
Qube Holdings (QUB, overweight) – we remain overweight the company. Following the Moorebank transaction, QUB’s balance sheet has returned to investment grade (at 2.5 times net debt to EBITDA) with the company announcing a $400m buy-back. QUB’s capex burden has also reduced from $1-1.2bn to $200-250mn, significantly improving the company’s FCF profile. We see further upside to QUB’s Operating Division as supportive trends drive higher consumer and housing activity in Australia and expect strong trading conditions in the Ports and Bulk division to persist amid high export volumes in resources and agricultural trade.
Key Detractors
Goodman Group (GMG, overweight) – the industrial REIT underperformed after key tenant Amazon called out excess capacity in its fulfillment and transportation network. We remain overweight. The fundamentals for the business across key global markets are strong, supported by tailwinds of ecommerce growth, supply-chain optimisation and a rebound in global industrial growth following COVID disruptions. We believe GMG can deliver strong earnings growth in FY22 with growing assets under management (at $60bn by year-end) and a strong development pipeline as the company benefits from the acceleration of e-commerce. In that context we no longer see its headline valuation, at a 12-month forward EV/EBITDA of 21.0 times, as stretched.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-May-2022.pdfApril, 2022
Key Contributors
Charter Hall Group (CHC, underweight) – the fund manager REIT underperformed amid concerns around higher real yields. The company also released its 1H22 result, with EPS below consensus forecasts for the period but full-year guidance upgraded by 7%. We remain underweight the stock based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the medium term as the cap rate compression cycle slows. As the growth rate of the business slows from impressive double-digit levels, we expect the multiple to contract, putting pressure on the share price outlook. Within the real estate fund manager space, our preferences are in Goodman Group (GMG) and Centuria Capital (CNI).
Key Detractors
Origin Energy (ORG, overweight) – the energy company outperformed as oil prices increased (with Brent Crude rising 46% to US$113/bbl), the outlook for higher electricity prices domestically and in response to a strong 2QFY22 result. LNG prices were ahead of expectations, averaging US$11.80/mmbtu during the period, while production was solid due to planned maintenance completing ahead of schedule. We remain underweight the company given its heavy reliance on Energy exposure to generate cash flow through its 27.5% stake in vertically integrated LNG export terminal APLNG. ORG has announced the closure of its Eraring
March, 2022
Key Contributors
Charter Hall Group (CHC, underweight) – the fund manager REIT underperformed amid concerns around higher real yields. The company also released its 1H22 result, with EPS below consensus forecasts for the period but full-year guidance upgraded by 7%. We remain underweight the stock based on our view that AUM growth and transaction volumes – which are running at elevated levels – will normalise in the medium term as the cap rate compression cycle slows. As the growth rate of the business slows from impressive double-digit levels, we expect the multiple to contract, putting pressure on the share price outlook. Within the real estate fund manager space, our preferences are in Goodman Group (GMG) and Centuria Capital (CNI)
Key Detractors Origin Energy (ORG, overweight) – the energy company outperformed as oil prices increased (with Brent Crude rising 46% to US$113/bbl), the outlook for higher electricity prices domestically and in response to a strong 2QFY22 result. LNG prices were ahead of expectations, averaging US$11.80/mmbtu during the period, while production was solid due to planned maintenance completing ahead of schedule. We remain underweight the company given its heavy reliance on Energy exposure to generate cash flow through its 27.5% stake in vertically integrated LNG export terminal APLNG. ORG has announced the closure of its Eraring
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Mar-2022.pdfFebruary, 2022
Key Contributors
Vicinity Centres (VCX, overweight) – the shopping mall REIT outperformed as omicron cases across the east coast of Australia appeared to have peaked after delivering a better-than-expected 1H22 result. Funds from operations (FFO) came in at $287mn, supported by the reversal of waivers and provisions from the prior year. We remain overweight the stock. While we continue to believe that shopping mall REITs face accelerated structural issues, we now believe this is well recognised with VCX trading at 0.81 times trailing NTA, and increasing direct transactional evidence at prices at – or close to – prevailing NTA’s. Due to its large exposure to Victoria (53% NTA), we expect short-term support as the state emerges from a high number of COVID cases.
Key Detractors
Scentre Group (SCG, underweight) – the shopping mall owner outperformed as omicron cases across the east coast of Australia appeared to have peaked. Its FY21 result came in below consensus forecasts – with FFO per share of 16.64 cents – however guidance for FY22 showed positive momentum with 5.1% growth y/y. Our underweight position is predicated on SCG’s higher leveraged balance sheet (equity / total tangible assets) as asset values continue to shift lower over time as specialty rental growth expectations continue to ratchet lower. Further, SCG is taking a tougher stance on negotiations with non-SME tenants, which we expect may lead to increased vacancy risks across the portfolio. Lastly, we do not see SCG’s forecast dividend yield of 5.1% as attractive compared to peers given these risks. Our preferred Retail REIT exposures remain Vicinity (VCX) and Charter Hall Retail (CQR), which offer more compelling risk adjusted valuations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Feb-2022.pdfJanuary, 2022
Key Purchases
Vicinity Centres (VCX) – we increased our position in the shopping mall REIT, where we continue to see upside as Australia emerges from the COVID crisis. While we continue to believe that shopping mall REITs face accelerated structural issues, we now believe this is well recognised, with VCX trading at 0.81 times trailing NTA and increasing direct transactional evidence at prices at or close-to prevailing NTA’s. Due to its large exposure to Victoria (53% NTA), we expect short-term support as COVID cases across the state continue to fall. Further, VCX’s balance sheet can withstand further disruption and asset value moderation following the $1.4bn equity raising in June 2020, with gearing falling to 25%.
BWP Trust (BWP) – we increased our position in the Retail REIT during the period. We believe BWP trades at a compelling valuation versus peers – 1.3 times 30 June 2021 NTA (based on conservative cap rates) with a 4.5% forecast yield – when considering its strong operating outlook, driven by well-located properties that encourage high rates of lease renewals from tenant Bunnings. Further, the REIT is set to benefit from higher inflation given CPI leases account for around 53% of its lease structures.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jan-2022.pdfDecember, 2021
Key Contributors
Aurizon Holdings (AZJ, underweight) – the rail freight operator underperformed after announcing the proposed acquisition of One Rail Australia for $2.35bn including a planned divestment of OneRail’s coal business. While the acquisition grows AZJ’s bulk business and modestly increases its diversification away from coal, it also raises execution risk (with significant uncertainty around selling the coal assets), increases debt and dilutes the near-term dividend. More broadly, we are underweight AZJ because we find the headline valuation unsupportive (at an EV/EBITDA of 7.6 times) when considering long-term revenue headwinds. We believe the outlook for customer end markets in coal will weaken further, with the commodity facing structural challenges as the world’s energy mix shifts away from emissions-intensive fossil fuels. Stockland (SGP, underweight) – the diversified REIT underperformed following its strategy update during the period. Management committed to shifting its portfolio away from Retail and Retirement and towards developing its Logistics, Office, Residential and Fund Management pipeline. While the change in strategy could support growth and reduce cyclicality in the business, it comes with increased execution risk and could weigh on Funds From Operations (FFO) due to the timing mismatch between divestments and new developments. We remain underweight SGP due to longerterm concerns around the sustainability of current booming residential conditions driven by pandemic-related stimulus programs. We expect this will see a moderation in residential profitability growth (35% of group earnings), where we see softer demand in the medium-term as the housing stimulus (HomeBuilder) rolls over and the impact of lower migration levels takes hold.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Dec-2021.pdfNovember, 2021
Key Contributors
Stockland (SGP, underweight) –the diversified REIT underperformed following its strategy update during the period. Management committed to shifting its portfolio away from Retail and Retirement and towards developing its Logistics, Office, Residential and Fund Management pipeline. While the change in strategy could support growth and reduce cyclicality in the business, it comes with increased execution risk and could weigh on Funds From Operations (FFO) due to the timing mismatch between divestments and new developments. We remain underweight SGP due to longerterm concerns around the sustainability of current booming residential conditions driven by pandemic-related stimulus programs. Notwithstanding its new strategy to reduce exposure, SGP still faces valuation risk given its exposure is to second-tier shopping centres (43% of NTA), where structural change is likely to accelerate. We also see downside risk to residential profitability (22% of NTA, but 35% of group earnings), where we see softer demand in the medium-term as the housing stimulus (HomeBuilder) rolls over and the impact of lower migration levels takes hold
Key Detractors
APA Group (APA, underweight) – the gas pipeline operator rebounded following its ultimately unsuccessful takeover bid for Ausnet (AST), reflecting relief in the market that APA would not pay a high price to diversify into electrification. We remain underweight the company on the grounds that APA’s initiatives to shift its business model towards electrification won’t be sufficient
September, 2021
Key Contributors
AGL Energy (AGL, underweight) – the energy company underperformed after delivering a FY21 dividend below expectations and issued disappointing FY22 guidance due to lower electricity wholesale prices (as hedged positions roll off) and higher gas costs. While FY21 NPAT met analyst forecasts, declining 34% to $537mn, for FY22 management guided to NPAT of $220-340mn, 15% below expectations. We remain underweight AGL. While we support the strategic logic of demerging its coal generation business from its energy retailing business, the reality is that the dis-synergies of doing so will mean that neither of the two resulting businesses have material debt capacity, suggesting additional equity may be required to support the demerger.
We maintain our conviction in the Real Assets sector, underpinned by solid fundamentals and attractive underlying valuation support. The S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Accumulation Index offers a 12-month forward forecast dividend yield of 3.8%, a compelling 2.3% premium above the 10-year Australian bond rate with the index dividend yield to increase in future years as traffic levels normalise on patronage based infrastructure assets.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Sept-2021.pdfJuly, 2021
Australian Real Assets outperformed the broader market in July as corporate action more than offset worsening COVID outbreaks across the country.
The S&P/ASX 300 Infrastructure, Utilities and A-REITs Accumulation Index returned 2.6% during the month, taking its 12-month return to 19.1%. In comparison, the broader S&P/ASX 300 Accumulation Index returned 1.1%, while overseas the S&P500 returned 2.4% amid an upbeat US corporate earnings season.
Within Infrastructure & Utilities (+5.3%), strong gains from Electric Utilities and Airport Services outweighed underperformance from Tollroads and Multi-Utilities.
Corporate activity increased during the period, with Sydney Airport (SYD, +34.9%) and Spark Infrastructure (SKI, +23.8%) receiving takeover bids. The SYD board rejected the bid on the grounds that it was opportunistic and not in the best interest of shareholders. SKI granted due diligence after receiving a third takeover bid – increased to $2.95 per share up from $2.80 per share previously – from a consortium comprising KKR and OTPP.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Jul-2021.pdfMay, 2021
The S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Accumulation Index fell -0.5% for the month, taking its 12- month return to 9.2%. In comparison, the broader S&P/ASX 300 Index returned 2.3% for the month, supported by the major banks on the back of the federal government’s big spending federal budget – with $96bn of stimulus announced over 5 years – and Australia’s strengthening housing market.
Within Infrastructure and Utilities (-3.3%) stocks, losses were led by utilities company AGL Energy (AGL, -9.1%) amid ongoing lower wholesale electricity prices, and gas pipeline operator APA Group (APA, -8.0%) despite reiterating FY21 EBITDA guidance and outlining its growth outlook at its Investor Day, including by shifting the business to renewables and transmission. Elsewhere, Sydney Airport (SYD, -5.2%) declined after the government pushed out the opening of international borders to mid-2022.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-May-2021.pdfApril, 2021
Infrastructure and REITs supported Australian Real Assets in April, more than offsetting ongoing weakness in the Utilities sector.
The S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Accumulation Index returned 2.7% for the month, taking its 12- month return to +15.1%. Real Assets underperformed the broader equities market, with the ASX300 returning +3.7% during April.
Within Infrastructure & Utilities (+2.1%), gains in Transportation Infrastructure (+3.7%) offset declines in Utilities (-1.2%) and Road & Rail (-3.8%). Toll road operator Transurban (TCL, +6.4%) outperformed after its third-quarter traffic update showed a recovery in its Australian roads amid easing travel restrictions, with management noting monthly improvements and more city-bound traffic. AGL Energy (AGL, -7.5%) declined after announcing the surprise resignation of its chief executive, effective immediately. Aurizon (AZJ, -3.8%) announced weaker coal volumes in 3Q21 as a result of weaker coal demand from customers, the end to one of its contracts, and weather disruption.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Apr-2021.pdfMarch, 2021
We maintain our conviction in the Real Assets sector, underpinned by solid fundamentals and attractive underlying valuation support. The S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Accumulation Index offers a 12-month forward forecast dividend yield of 4.2%, a compelling 2.4% premium above the 10-year Australian bond rate.
Within Infrastructure, we believe that in the long run strong fundamentals and attractive growth opportunities should continue to support the likes of Transurban (TCL) and Atlas Arteria (ALX). In the nearer term, we expect toll roads to be at the forefront of the post COVID-19 recovery in activity levels amongst patronage-based infrastructure assets. We remain cautious towards infrastructure providers with exposure to cyclical end markets such as AGL Energy (AGL), with a strong preference within Utilities for APA Group where we see substantial scope for operating cash flow growth and higher dividends over the medium term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Mar-2021.pdfNovember, 2019
We maintain our conviction in the Real Assets sector, underpinned by solid fundamentals and attractive underlying valuation support. The S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Accumulation Index offers a 12-month forward forecast dividend yield of 4.0%, a compelling 3.1% premium above the 10-year Australian bond rate. Within Infrastructure, we believe that in the long run strong fundamentals and attractive growth opportunities should continue to support the likes of Transurban (TCL) and Atlas Arteria (ALX).
In the nearer term we expect toll roads to be at the forefront of the post COVID-19 recovery in activity levels amongst patronage-based infrastructure assets. We remain cautious towards infrastructure providers with exposure to cyclical end markets such as AGL Energy (AGL) with a strong preference within Utilities for APA Group where we see substantial scope for operating cash flow growth and higher dividends over the medium term. Within A-REITs, we maintain a strong preference to being exposed to high quality asset owners with strong balance sheets at more attractive valuations such as GPT Group (GPT).
We believe the structural headwinds facing shopping mall owners are likely to persist – changing consumer preferences are directing an increasing proportion of retail sales away from malls to online – and we continue to maintain a highly selective approach across the sector, steering away from owners of malls lacking strong competition barriers and steering towards resilient sectors with attractive long-term leases (10-years+) to high quality tenants such as service station owner Waypoint REIT (Viva Energy). We expect COVID19 will create patches of short term uncertainty for earnings and distributions, as tenants exposed to the Australian consumer and SME customer are faced with escalating operating constraints in the current period. Robust balance sheets (average gearing levels around 25% net debt / total assets), solid levels of liquidity and strong in-place occupancy levels suggest REITs are well positioned overall to see through the current dislocation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Yarra-Australian-Real-Assets-Securities-Fund-Nov-2020.pdfticker: JBW0030AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.yarracm.com/australian-equities/yarra-australian-real-assets-securities-fund/
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fund_features:
The Yarra Real Assets Securities Fund provides investors with the attractive qualities of resilient earnings built on long-life assets and strong market positions. The Fund invests in 15 – 25 securities, utilizing a style-neutral, long-term approach where stocks are selected based on active insights from the team’s rigorous proprietary research.
- The Fund aims to outperform the S&P/ASX 300 Custom Infrastructure, Utilities and A-REITs Index over rolling three-year periods.
- To achieve a balance of income and medium-to-long term capital growth by investing primarily in Australian listed infrastructure, utilities and REIT securities.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australia Other
peer_benchmark: Domestic Equity - Other Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund