AREITs - In search of growth

Amy Pham

Pengana Capital Group

Looking at the reporting season scorecard, there was a vast improvement compared to last year. 15 REITs provided either EPS or DPS guidance. Those withholding guidance have retail exposures (CQR, GPT, SCP, VCX & URW) and cited uncertainty surrounding COVID with the recent NSW and VIC lockdowns being the key drivers. However, of the REITs that did provide guidance, many indicated that it was based on the assumption of a reopening by the end of the year following a successful vaccine rollout.

With structural shifts continuing to put pressure on retail and office earnings and the tight pricing in the direct markets for favourable assets, such as industrial and long WALE, many of the REITs (DXS, SGP, VCX, MGR, GPT, GOZ, SCP and AVN) have shifted towards active earnings, such as development and funds management, in order to generate growth. Out of the 8 REITs that have flagged their ambition to grow their fund's management businesses, DXS has been the most active thus far in winning the management rights for the AMP Capital Diversified Property Fund, taking over the listed APN Property Group (APD) and forming a partnership with Australian Unity in their Healthcare Fund. These transactions have increased DXS’s FUM by 60% to $25bn, making it the third-largest real estate fund manager in the sector after Goodman Group at $58bn and Charter Hall Group at $52bn.

Other REITs, such as Vicinity (VCX), have started a strategy to shift from being pure retail landlords to a broader real estate business with mixed-use developments and new funds management initiatives. VCX anticipates that they can grow this from 10% of earnings to 20% over the next ten-year period. Whilst these initiatives are seen as positive, it will take several years to build a track record and investors are unlikely to pay a premium for these earnings. The new entrants will have to compete with existing fund managers such as Goodman Group, Charter Hall Group and Centuria Capital, who have achieved consistent FUM growth of 20%+ over the past 3 years.

We have also seen REITs positioning for growth post COVID with Mirvac ramping up its two Sydney apartment projects (Willoughby and Harbourside), Stockland expanding in Manufactured Home Estates (MHE) post acquiring Halycon, and many groups taking advantage of low cap rates and robust tenant demand through developing logistics assets. This ability to create assets instead of competing in the direct market is seen as a key differentiator for earnings growth going forward.

Once again, this reporting season has highlighted the resilience of cash flow in the alternative real estate sector. Across the board, there were positive asset valuations in childcare, healthcare, data centres, farms, manufactured housing and land lease estates, driven by strong investor demand and continued cap rate compression. Furthermore, rent relief due to COVID has been minimal due to their exposure to essential services with long leases and government support to operators (childcare).

We continue to favour REITs with strong free cash flow and back management teams that can grow sustainable earnings through development and capital recycling. As a high conviction manager, we are benchmark unaware and can allocate to sectors with favourable thematics and growth outlooks including all the alternative real estate sectors highlighted above. Currently, the Fund has over 20% exposure to these alternative sectors compared to our benchmark of 6%.

Learn more

More information about Amy's fund can be found here. Stay up to date with the latest high conviction opportunities in the property sector by registering for Amy's next webinar here, or contact us to learn more about the Pengana High Conviction Property Securities Fund.

Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana High Conviction Property Securities Fund (ARSN 639 011 180) (the “Fund”). A product disclosure statement for the Fund is available and can be obtained from our distribution team. A person should obtain a copy of the product disclosure statement and should consider the product disclosure statement carefully before deciding whether to acquire, or to continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana Capital Ltd and does not contain any investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Neither Pengana Capital Ltd nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in, the Fund.

Amy Pham
Fund Manager - Pengana High Conviction Property Securities Fund
Pengana Capital Group

Amy is portfolio manager of the Pengana High Conviction Property Securities Fund, and has over 20 years of property funds management experience. Previously, Amy has worked at Charter Hall/Folkestone for 6 years, managing a high conviction...

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