Transcription of Finance News Network Interview with Presima Global Property Securities Concentrated Fund, Portfolio Manager, Marc-André Flageole John Treadgold: Hello I’m John Treadgold for the Finance News Network and joining me from the Presima Global Property Securities Concentrated Fund, is its Portfolio Manager, Marc-André Flageole. Mark, welcome back to FNN.
Marc-André Flageole: Good to be back, thanks a lot.
John Treadgold: Presima invests in property all over the world. Can you give us a brief overview of the Fund and explain what sets Presima apart?
Marc-André Flageole: Presima is a boutique investment manager, with a track record of its product dating back to 1999. We are all in the one location based in Montreal Canada; we’re a team of 12 investment professionals. What sets us apart in our concentrated strategy is the fact that we own only 30 to 40 securities globally. So a very differentiated approach from our benchmark.
Roughly 50 per cent of where we invest is North America, close to 13 per cent in Europe, 30 per cent in Asia Pacific and the bulk here in Australia, about seven per cent of our Fund.And again, what sets us apart is being very different from the benchmark, being very concentrated, but also running a very high active share portfolio.
John Treadgold: Australian property has surged in recent years. How does that compare to international markets, and what trends have you recognised between the two?
Marc-André Flageole: You’re right; Australia has been a very strong REIT market over the last two years. And that’s really a function of strong demand we’re seeing on the private real estate side, which really drove up valuation levels of assets. And also, easier monetary conditions that we’ve seen with the RBA lowering the rates, and interest rates level in general that have come down, so very supportive of property here in Australia.It compares very well on a global basis. If you look at markets that actually outperformed the Australian market over the last two years, the US and the UK are standouts. These markets have seen quite positive fundamentals, but also very strong demand from an institutional perspective, on the direct real estate side.
And contrasting that with markets that didn’t do so well, my own country of Canada REITs have been struggling and underperforming global peers, on relatively weak fundamentals in the retail orthe office space. But also due to the fact that Canadian REITs are typically offering the investor very, verylittle growth and they’re also highly levered, compared to the global counterparts selling at leverage superior to 40 per cent, on average.
John Treadgold: Where does Presima see the greatest opportunities?
Marc-André Flageole: A couple of places. If you look at 2015 so far, its been a relatively strong start for the year overall for the global REITs. Recently it’s been a bit more difficult, especially in the United States with all the noise around the Federal Reserve that might increase rates, relatively soon. So the REITs have been sold off by generalist investors mostly. And we feel as specialists; it’s a pretty good entry point at this point. If you look at the US REITs, they’re trading now on average at seven per cent,discounted and at asset value of their assets. Their real estate assets they hold, which is now compared to the historical range, two standard deviations below their standard valuation, or their average valuation.
So we feel it’s again, a very attractive point for US REITs, coupled with the fact that we are expecting six to seven per cent growth from an FFO (funds from operations) or earnings perspective in the US, which is pretty sound fundamental supporting earnings, but also dividends. Other themes we like are Japanese hotels. It’s a very niche sector, but there’s a large tourist boom in Japan at the moment, driven mostly by other Southeast Asian visitors and the bulk of it is China.
So the hotel landlords in Japan, there are a few JREITS that are operating in that sector and we’re very positive on them. Finally another thematic we like is UK student housing, we’ve been investing in that sector for a while, very steady cash flow, very steady growth. But also we feel that institutional demand will come to that market on the direct real estate side, which will support valuation of REITs, which trade at discount at this point that the transaction we’re seeing, in the direct market.
John Treadgold: Looking at Presima in more detail. How have you done over the last 12 months?
Marc-André Flageole: It’s been a very strong year for us, since the inception of the Fund here in Australia. But 2014 was a good outperformance year; we outperformed our benchmark by close to 380 basis points. And the absolute performance was about 20 per cent based in US dollars, so very good year. 2015 so far is off to a good start for us, we’re outperforming by approximately 200 basis points, so again, a very strong alpha creation from our perspective. And over the long term, so beyond this year, since 1999 the inception of the Concentrated Fund, we’re adding slightly more than 200 basis points per year of value. So the Fund is realising its objective.
John Treadgold:What are some of the risks that you’ve identified on the horizon, and how do you invest in that environment?
Marc-André Flageole: A couple of things. Some things we watch very closely, as obviously the macro economy, at the end of the day, this is what affects real estate fundamentals for REITs. So the macro economy situation globally, is something that needs to be well assessed from our perspective.On the horizon as well, if you look at the acquisition market, real estate values globally have gone up quite a lot. So it’s difficult for REITs at this point, to find good value in acquiring assets. So it might slow down the growth and their earnings through external acquisition.
Looking at the level of leverage now globally, it’s around 31 per cent, which is one of the low points we’ve seen in recent history. The cost of that is very, very cheap, very accessible debt as well. So our risk we’re watching for, for REITS manager is the potential acquisition of assets that wouldn’t necessarily be of average, or subpar quality. Given the very easy access to capital, it’s very easy for them to acquire these assets and to get a relatively good accretion in the short term. But we’re more worried about some of the long-term prospects of assets being acquired.
Looking at Japan as an example, we are seeing some chariots now acquiring assets that are a bit of a subpar quality, for yields that make sense today. But we’re not sure that these yields are sustainable for the very long term. So the assets make sense, but that’s mostly because of the cheap cost of debt.
John Treadgold: How do you see global property performing to the end of 2015 and beyond?
Marc-André Flageole: 2015 started very well, but recently it’s been a bit more difficult for North America specifically, so the US REITs have corrected. So we think at this point, that the performance should be quite strong for a couple of things supporting the REITS. We feel the fundamentals; we are expecting six to seven per cent earnings growth this year and next year. And that’s fairly supportive of most of the sectors, not only in the US, but globally. Certainly supportive of dividend yields, which is a strong point of global REITS obviously.
We’re also watching closely the demand for direct real estate and we’re seeing in many, many jurisdictions in the world, some strong demand still. As of today, the REITs since they’re trading at discount now, to real assetor the real estate asset value we’re seeing. Typically if demand remains very strong, it’s a good predicament for future performance. So at this point in time, the discount is actually doing well for performance for the rest of the year.
John Treadgold: Marc-André Flageole, thank you for the update from the Presima Global Property Securities Concentrated Fund.
Marc-André Flageole: Thank you, thank you very much.
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