Investment Matters

Profit reports trickle in

Interestingly, we have seen the US market continue to surge ahead, propelled by Apple and Microsoft, with the Nasdaq now 14% higher than its pre-COVID peak:

2819IM03However, what has gained less attention is that since the market sell off in February gold has outperformed both the NASDAQ and ASX (in US dollar terms).

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The relative performance seen in chart above is emblematic of some key considerations in a post COVID world, that is:

  1. The extent of support by government and central banks – which has anchored bond yields and increased the supply of money, sending Gold higher and causing investors to question what the extent and shape of future support will be and how this will impact inflation, growth and most importantly, asset prices.
  2. The potential for changes in social preferences - which has led investors to question how we should extrapolate the change to the way we work and live during COVID into the future (and how much NASDAQ listed companies such as Amazon and Apple could benefit).
  3. The premium placed on technology and innovation – the current uncertain growth and low interest rate environment has caused investors to once again ponder how much more they should pay for some certainty of future growth and innovation.

On the reporting front, it was a relatively quiet week with only a few results released by your companies.

Reporting season will begin in earnest from next week, with over 25 companies set to report.

As always, Real Estate Investment Trusts (REITs) led the August reporting season, with three REITs held in your Property sub-portfolio reporting this week.

Centuria Office REIT (COF)

COF is Australia’s largest ASX listed pure-play office REIT, with a portfolio of 23 assets across 6 states.

The trust met its guidance for the year, with distributions per unit of 17.8 cents for FY-20. This represents a distribution yield of over 9% based on its current unit price.

COF’s property portfolio continues to have good metrics, with occupancy at 98.1%, an average lease expiry of 4.7 years and gearing at 34.5%.

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Although COVID will continue to impact the property market, collection of rent from April to June from tenants was pleasing (averaging 92%). Its result also reaffirmed the book value of its properties, which is largely unchanged from FY-19 (-1.1%).

With this comes an awareness that there may be downside risk post-COVID to office values that may not yet be reflected in book values.

Subsequently, over the past few weeks, your exposure to the fund has been lightened by a third in line with our views of the investment’s long-term value.

Our recent investment in COF as the market has fell has been successful – with additional units purchased as the market bottomed in March returning 14%*. Overall, active management of the position has resulted in a return of -5% since June-19, relative to -23% for the stock itself in what was a terrible year for the broader Property Index which has returned -20%.

Centuria Industrial REIT (CIP)

The Centuria Office REIT consists of a portfolio of 51 industrial properties in key metropolitan areas throughout Australia.

The trust delivered distributions per unit of 18.7 cents for FY-20 – in line with its guidance.

Its properties also continue to have strong metrics, with occupancy at 97.8% and an average lease expiry of 7.2 years (10.2 years post-acquisition) and gearing has reduced to 27.2% (FY-19: 37.4%).

With a resilient tenant base (ASX listed and listed multinationals in FMCG, packaging) average rental collection from April to June was 97%, which was pleasing.

In addition to its results, CIP announced an equity raise, the proceeds of which will be used to purchase three industrial assets (raising $340m to purchase assets of $447m in value).

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The largest of these assets ($417m) is Telstra’s Data Centre Complex in Clayton, which will be purchased as part of a sale and leaseback arrangement under a long, triple net lease (30 years) and have some development potential.

We participated in the Entitlement Offer, which was at a 4.8% discount to the last closing price per unit.
This increases the portfolio’s exposure to industrial property, which we see as being more defensive than other sectors and benefiting from short- and longer-term structural trends.

CIP has been a successful position in the Property sub-portfolio, returning over 25%* since first purchased in mid-May.

Centuria 8

Centuria 8 is a property trust which owns a commercial office building located in Sydney’s technology park.

The property remains well leased, with an occupancy of over 100% and an average lease expiry of 8.5 years.

Several existing leases due to roll off the near term have been renewed, with 98% of leases now due to expire beyond FY-23.

The property’s valuation has thus far been minimally by COVID (-1.1%) and the investment has paid distributions representing a yield of  5.15% thus far for FY-20.

* Return indicative of that for the average client portfolio.