This asset class is down 25% in 12 months. Here's two opportunities …

There’s no denying that the “new normal” hasn’t been challenging for listed property investors, and property investors in general, for that matter.  Over the past 12 months (rolling one-year return to March 23), locally listed real estate investment trusts (AREITs) have come under pressure, with the benchmark falling 14% as rising interest rates and inflation took their toll. Global REITs (AUD Unhedged), in comparison, are down 23%. 

Resolution Capital’s Global Property Securities Fund (ASX: RCAP) hasn’t been immune to this drawdown.

However, timeframe matters and since its inception in September 2008, the Fund has delivered investors a net return of 7.5% per annum (2.5% alpha per annum over the benchmark).  

“You’re seeing evidence of that stress very recently with the bank failures in the US, and concerns of more in Europe,” Resolution Capital co-portfolio manager Julian Campbell-Wood said.

But a hallmark of the Resolution Capital strategy is to always invest on the conservative end of leverage, he added. And right now, Campbell-Wood and the team are of the view that despite the sell-down in REITs, fundamentals across key property sectors remain strong. In fact, they believe it is one of the most compelling times in recent history to selectively build exposure to global listed property.

“We want REITs to have modest debt levels so that they can withstand this cyclicality, but it’s even more important in these environments to move away from those businesses which need external capital,” Campbell-Wood said. 

As part of Livewire’s inaugural Listed Series, I sat down with Campbell-Wood to learn more about RCAP’s strategy, as well as the team’s outlook on various property sectors in this difficult macro environment, and two examples of mispriced opportunities today. 

Note: This interview was recorded on Thursday 16 March 2023. You can watch the video or read an editorialised version below. 

[embedded content]
 

FUND INFORMATION

• Name: Resolution Capital Global Property Securities Fund (ASX: RCAP)
• Asset Class: Global real estate investment trusts and property companies. 
• Description: The Global Fund aims to provide Investors with a level of distributable income combined with the potential for long-term capital growth sourced from global real estate-based revenue streams.
• Objective: The Resolution Capital Global Property Securities Fund (Managed Fund) aims to exceed the total returns of the Benchmark (FTSE EPRA/NAREIT Developed Index (AUD Hedged) Net TRI) after fees on a rolling 3-year basis. 
• More information: Click here

Real income, inflation protection, and global diversification 

The Resolution Capital Global Property Securities Fund was made available to investors as a managed fund 15 years ago.

But in February 2022, the ResCap team made it available to a wider universe of investors by offering the strategy as an active ETF on the ASX.  “It’s really creating a simple access point for investors,” Campbell-Wood explained. 

“When investors are going through mutual funds or pooled funds, you’ve got the paperwork, it can be a little bit cumbersome. So it’s really just providing an efficient and convenient access point to the strategy.” 

As investors can access the strategy through their regular broker, they can also trade in smaller amounts than the minimum investment required to invest in the managed fund – which in this case, is £25,000. 

“It’s simply about convenience for our clients,” Campbell-Wood said. 

So, in an environment where REITs, like other listed asset classes, have suffered in recent times, how does the Global Property Securities Fund compare? 

Well, according to Campbell-Wood, RCAP provides exposure to a really high-quality portfolio of global real estate, helping investors diversify their portfolios away from the typical Australian bias.  

“You get the attractive features of real estate, which can be a real income profile over time, so those inflation hedging characteristics, which is good, and also a total return profile, which is underpinned by an acceptable dividend yield around 4%,” he said. 

“So it’s providing that return profile, inflation protection, but also effective diversification for clients.” 

Over the past 15 years, the strategy has been focused on a concentrated portfolio of typically 45 high-quality global REITs. 

“What we did differently at the start was really focused on property sectors [rather than regions]. So when you look at what property markets have been doing, in terms of the return profiles, a lot of the big themes are global,” Campbell-Wood said.  

“Whether it’s digitisation – all of us using online platforms, data, etc – or the impact of eCommerce in terms of retail and logistics, or ageing demographics, there are big themes driving real estate markets.” 

Another key difference is the strategy’s “multi-portfolio manager approach”.  “There are four PMs, of which I’m one, and we each manage a quarter of the AUM and consolidate those portfolios for the ultimate client portfolio,” Campbell-Wood explained. 

This results in two key benefits, he added. 

“Firstly, you remove some of that key man risk – you’ve seen some issues in the Australian market with key man risk for fund managers. Because we have four people managing the AUM, that creates that consistency of approach,” he said.  “Over the last 15 years, we’ve had a couple of PMs who’ve moved on for various reasons, but there’s been no change in the way the portfolio has been managed.

And that consistency, I think, benefits investors in terms of the long-term returns of the strategy.” 

ResCap’s outlook on listed property

While Campbell-Wood admits it’s been a difficult period for all listed asset classes, he believes the fundamentals of this sector are in “pretty decent shape” in the context of a challenging investment environment. 

“We’ve just come back from a big global real estate conference in Florida. We met with a lot of the companies we invest in across the US, Europe, and Asia. And by and large, the operating conditions are still pretty good,” he said. 

This includes tenant demand and supply, which can impact real estate returns.  

He points to the US single-family residential sector as a sector the team had been adding capital to in recent times. 

“We think is fundamentally cheap. It’s a very simple business. It’s basically single-family homes rented out to individuals and families. And the US is suffering from an under-supply of these homes – two to four million by some estimates,” Campbell-Wood said.

“It’s a very simple model, there’s good demand for the property, and it is trading cheap to the underlying real estate.

So that’s been one area where we have been adding exposure more recently.” 

While US residential may be booming, US office isn’t. 

“US office is facing some pretty extreme challenges at the moment, to the point where it’s being picked up in the Australian press,” Campbell-Wood said.  “You’ve got some landlords who are actually handing back the keys to banks. So they’re saying, ‘All right, the equity’s wiped out, it’s now your problem.'”

US landlords have struggled to get people back into the office and demand is heading southward, he added. 

“We’ve got minimal exposure to US office because the demand and supply fundamentals are pretty challenged.

So that’s one area where I think you will continue to see more operating stress,” Campbell-Wood said.

So where do you find defensive exposures in this kind of market? Campbell-Wood points to resilient businesses where demand is either needs-based or necessity-orientated. 

“In the US, it’s sectors like net lease real estate. So that’s single tenant, retail property, grocery stores, pharmacies, convenience stores, and drug stores – all with very consistent cash flow from the tenants,” he said. 

“Those portfolios have held up very well given the nature of the tenants and the demand.”  Regionally, he believes that Asian regions will continue to hold up well. 

“In the last 12 months, positions in Japan and Hong Kong have actually provided pretty good diversification as those markets are facing different dynamics that haven’t had the same increase in real rates and the same inflation pressure,” Campbell-Wood said. 

“Also, now with China reopening, it’s providing a boost to some of those regions.” 

Key portfolio positions 

Campbell-Wood names Invitation Homes (NYSE: INVH) as one of the portfolio’s biggest bets.  

“They own 83,000 single-family homes across the US,” he said. 

“It was really built out of the GFC’s housing crisis. And it’s in markets like Atlanta, Phoenix, Tampa, so some of those Sunbelt states where you’re seeing quite healthy migration from some of the more expensive coastal states in the US.” 

This company is benefiting from strong demand levels, high occupancy and the tenant base continues to grow over time, he added. 

“There’s a good demand profile to continue.

And a housing shortage as well,” Campbell-Wood said. 

“And as we touched on, it’s trading cheap to the underlying real estate. So we think that’s a good exposure to have in a needs-based real estate sector.” 

He also points to another US self-storage business, Public Storage (NYSE: PSA), as a core position in the Fund. 

“It’s a simple model most of us have used at various points in time, but it’s very cash flow efficient and typically economically resilient,” Campbell-Wood said. 

“Public Storage is the largest storage platform globally. It’s got the best balance sheet in the US REIT sector.

So it’s well-positioned to withstand what could be choppy or volatile economic conditions in the next six to 12 months.” 

Given mounting fears of a substantial economic slowdown, Campbell-Wood added that the Fund’s positioning was “not all about the US”. 

“We’ve been increasing exposure in Asia more recently,” he said.  “We’ve had very little exposure to Hong Kong as an example, in recent years, given it’s been facing significant challenges. So we have increased exposure there more recently, and also to other Asian markets which are facing different operating dynamics.” 

The portfolio can also shift to more defensive property types within the US, UK and European markets – sectors like healthcare-related real estate or seniors housing, for example.  “That’s where we’ve been increasing allocations recently,” Campbell-Wood said.  Never miss an update

Enjoy this wire?

Hit the ‘like’ button to let us know.

Stay up to date with my current content by following me below and you’ll be notified every time I post a wire