SGH Property Income Fund: March 2025 quarter update
SGH Property Income Fund March 2025 quarter update from Grant Berry, Lead Portfolio Manager of the SGH Property Income Fund, reflecting on fund performance, portfolio moves, and the outlook amid ongoing market uncertainty.
Strong March quarter performance
The March quarter was a good quarter for the SGH Property Income Fund, delivering a return of 3.7%. This contrasted markedly with the AREIT sector, which was, in fact, down 6.6%. The AREIT sector was influenced in February by the Goodman Group Capital raising. In March, there were negative valuation implications for the sector due to a slight sell-off in real bond yields. We also had reporting season during the March quarter, which was quite positive for AREITs.
Valuations were essentially stable, with a slight softening in some of the office names. Occupancy was resilient. We had slight negative earnings revisions for the sector. However, the portfolio proved more resilient, which provides some explanation as to the outperformance as well.
Post-quarter market events and portfolio resilience
After the end of the quarter, we’ve had some major tariff announcements by Trump and retaliation by the Chinese, which has seen duration through the equity markets. Our portfolios proved much more resilient through this sell-off, holding up quite well. And this, to us, makes sense. By design, we are focused on traditional REITs, rent-collecting REITs with, in many cases, long-term lease contracts at attractive valuations. What we’re seeing in the markets is the prospect of more meaningful interest rate cuts, which may provide earnings tailwinds going forward. So, the portfolio is holding up very well through these more challenging times.
Minimal changes in portfolio positioning
For the SGH Property Income Fund, we focus on investing in good-quality traditional REITs for income underpinned by rent. As expected, the portfolio positioning has not changed much over the quarter. We’ve been adding to our position in GPT Group and Growthpoint Properties Australia. The catalyst for Growthpoint Properties Australia has been the valuation, which now looks more attractive as the price has come back, but they’ve also sold down some industrial properties into a fund partnership to reduce their gearing as well. So, we quite like that move. Against that, we’ve been reducing our positioning in Vicinity Centres and Scentre Group.
Now, as we move to the post-quarter end, we are a little bit more cautious regarding the discretionary end of the retail market, but we’re more positive regarding the non-discretionary end. So, we’ve been increasing our exposure there primarily through Region Group.
Attractive valuation and constructive outlook
The portfolio is well-positioned, very resilient, and trading on attractive valuation metrics. It is about a 15% discount to its net tangible asset backing and around a 20% discount to our net asset value using our through-the-cycle approach. Pulling that all together, we feel quite constructive about the outlook for our portfolio from here.
More meaningful interest rate cuts could manifest, providing an earnings tailwind going forward. The valuation, as I mentioned earlier, is quite attractive.
Diversification and portfolio construction
These are interesting times that we find ourselves in today, post-month-end, but having been around the markets for 30 years now, there are always interesting times, and that’s why putting together a well-constructed portfolio is very important. A diversified portfolio, we only have one holding above 10%. It is well under our 15% limit, which contrasts with the AREIT sector, where we have one stock that’s 35% of that sector, for example. What we’ve been doing over the past year is broadening our portfolio across the names and sizes. We’ve been going into smaller names where we see good value and very resilient, less economically sensitive securities such as childcare might be one of them.
Broadening sector exposure
We’ve also been broadening the type of sectors in which we invest. I just mentioned childcare, to which we’ve been increasing our exposure. So, the portfolio is very diversified. We like that. The valuation is attractive. Trading below NTA, the portfolio has proved to be very resilient through the tough months of February and March, and now, extending to April, it pretty much hasn’t missed a beat.
Positive interest rate outlook and yield focus
As we sit here today, the prospects of interest rate cuts are higher. If you have resilient cash flow underpinned by leases and think of assets like a service station or childcare centre, the rental income stream is not going to change, but the cost of the debt is going to reduce.
That provides an earnings tailwind, which is positive. Bond yields have rallied a bit as we sit here today, providing a valuation buffer for the portfolio. So, going forward, we expect the portfolio characteristics we found in the last few months to be resilient.
The income yield is also attracted from the portfolio and is a significant focus for us. We expect that to support the returns going forward.
* The text has been edited for clarity.
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