Trends and valuations in AREITs

Funds Management

by Carolyn Herbert

Transcription of Finance News Network Interview with Antares Listed Property Fund Portfolio Manager, Brett McNeill

Carolyn Herbert: Hello I’m Carolyn Herbert from the Finance News Network and joining me from the Antares Listed Property Fund is Portfolio Manager, Brett McNeill. Brett, welcome back.

Brett McNeill: Thanks very much Carolyn.

Carolyn Herbert: As an Australian listed property manager, have the recent political events such as Brexit and the Australian election, had any impact on the AREIT sector?

Brett McNeill: Normally markets don’t like political uncertainty and perform very poorly during those periods. But for the Australian Real Estate Investment Trust, the AREITs, it’s actually been the opposite. The AREITs have thrived in the current politically uncertain environment and really, that’s owing to the defensive nature of the asset class. So it’s been another very good period of returns for the AREITs sector. So for the three months to June 30, the sector returned 9.2 per cent and for the six months to June 30, a stunning 23 per cent total return.

Carolyn Herbert: What trends are you noticing in the AREITs sector?

Brett McNeill: The overwhelming trend for us at the moment in the AREITs sector is really how in favour the asset class is. It’s really being sought after by investors, owing to its perception as a safe haven status and a real defensive earning stream. High quality distributions being paid out, solid cash flows, strong balance sheets and still sensible payout ratios as well. So all of this has been received very well by investors.

In line with that theme of the sector being very much in favour, we’ve started to see a lot of IPOs being brought to market. And the biggest of these is the Viva Energy REIT Limited (ASX:VVR). So Viva Energy REIT is a new Australian real estate investment trust. It owns 425 petrol stations and it’s set to list on the Australian Stock Exchange on the 3rd of August, with a market capitalisation of about $1.5 billion. So it’s the biggest Australian real estate investment trust IPO we’ve seen for some time.

Carolyn Herbert: Do you believe that current yields on Australian REITs are sustainable?

Brett McNeill: We think that the valuation of the sector is quite expensive. Today the pricing of the stocks is expensive, reflecting how sought after the AREITs are as a safe haven asset class. But we think the yields are sustainable and quite solid. So if we look at what sits behind the yields being very strong balance sheets, sensible payout ratios, strong cash flows, there’s a very different situation today versus prior to the GFC. So overall, we think that the dividend yields are quite sustainable and solid, which is a very important thing for investors.

The biggest risk to the sustainability of the dividend yields, from our point of view is a potential increase in interest rates. Now that’s not the market’s thinking at the moment. In fact the market thinks the opposite that interest rates are set to continue to fall in Australia, and that might well be the case in the short to medium term. But we think the really important thing for investors is not to get too complacent, in the current low rate interest environment. And so on that theme, one of the main things we do in our cash flow forecast for the REITs themselves, is to assume a reversion back up in interest rates over time.

Carolyn Herbert: Turning to performance now. How has the Antares Listed Property Fund performed, and what have been some of the standout stocks?

Brett McNeill: Pleasingly, the Antares Listed Property Fund’s delivered another strong return. So for the 12 months to 30th June, the Fund delivered a net return of 23 per cent for investors, which is really really pleasing. But we should caution that is well above what we consider to be our long-term average expected return for the sector, which is really around seven to 10 per cent per annum. So a 23 per cent return over the last 12 months has been very nice.

In terms of the stocks that have contributed to it, Iron Mountain Incorporated (NYSE:IRM, ASX:INM) has been a really good performer for the Fund, in recent times. It’s a new stock in the portfolio. Iron Mountain’s a global document storage and information management business that only listed on the Australian Stock Exchange in the last three months. And that was after it took over the Australian listed Recall business. So it now has a dual listing in America and on the ASX. So that’s been a good performer for the Fund.

And other stocks include Goodman Group (ASX:GMG) with a share price closing above $7.00 on the 30th of June, and we really like their strategy. They continue to do what we think are all the right things for this point in the cycle, which is de-gear the balance sheet and sell lower quality assets, and improve the portfolio quality. So Goodman Group’s been another pleasing performer and Stockland Group (ASX:SGP) as well. Stockland Group finished the half at a share price of $4.71. They’ve delivered good growth over the last 12 months, and we expect earnings and distribution growth of about seven to eight per cent for the next financial year, which is very attractive in the current low growth environment.

Carolyn Herbert: Brett McNeill, thanks for the update on the Antares Listed Property Fund.

Brett McNeill: Thanks very much.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.