SGH Property Income Fund – Quarterly Update
March quarter 2024, Grant Berry
Key market drivers for SGH Property Income Fund*
The SGH Property Income Fund had a good March quarter, extending performance from the prior quarter, which was also good. Alot went on over the quarter.
Firstly, we had reporting season in February. We saw occupancy hold up well. We saw the retail stocks perform very well in terms of releasing spreads and occupancy etc. So the top line was really good.
It was a very narrow month in the month of February. The sector was up over 4%, but that heavy lifting was really done by 4 constituents, primarily Goodman Group. So only four stocks of the 33 outperformed the REITs sector.
March was quite different. March was a very strong month and the sector was up 9.5%. In contrast to February, of the 33 constituents, 18 of them delivered a return greater than 8%.
If we then narrowed that down a little bit further, we found that most of that performance of the month of March really came about after the Reserve Bank of Australia decision which was midway through the month with the sector up about 7%. Around the same time the Fed reserve came out with comments as well and also put rates on hold.
So both central banks putting rates on hold provided a bit of relief and was supportive for the market.
Interestingly, the commentary from the Federal Reserve revised up their GDP outlook and that also provides a good backdrop for REITs.
SGH PIF performance
Our portfolio lagged over the quarter. We delivered a good absolute return, but we lagged the Index, the key reason being Goodman Group. We don’t own Goodman Group in our Property Income Fund, as it just does not provide sufficient income yield. It’s a stock that’s priced in excess of $30 and it pays a 30-cent distribution, or less than a 1% yield. It just does not hit the metrics to sit within our income fund.
We see much better opportunities for income generation elsewhere and as a consequence, the fund in an absolute sense lagged the REITs sector over the quarter.
SGH Property Income Fund positioning
In terms of the Fund positioning, this portfolio is about investing in real property, for income and at attractive valuations. As a result, the changes are quite incremental and we typically take a 5-year view.
Having said that, we have made some changes. We’ve continued to add to Charter Hall Retail that I mentioned in the prior quarter update. It’s attractively valued and it’s a good source of income yield.
We’ve also added to our position in Dexus Property Group. This is a stock that we didn’t own a couple of years ago, but currently offers some very attractive value metrics. Their the largest office landlord in the country, also have industrial property portfolio and a funds management platform.
Office is certainly unpopular at the moment, but having said that, the values have been marked down and then the securities are trading at a very material discount to Net Tangible Assets (NTA) as well, and it’s providing a good income yield. We are seeing value there and hence why we’ve been adding to our position.
At the same time, we’ve trimmed back our position in the GPT Group early in the quarter. It did underperform over the quarter, as well, which reinforced the decision to scale it back. Having said that, it’s now starting to look more interesting again because the market has actually repriced it and we’re happy with our position and if anything would be more biassed to add into our position rather than taking further away from here.
Has the outlook for the AREIT sector and the Fund changed?
In our view, we think the outlook for the sector has actually changed. The sectors had an enormous run, delivering 35% return or thereabouts over the last 12 months.
Now we see the sector as quite bifurcated. We’ve got a cohort of securities on one side that are quite expensive, providing very low distribution yields, that are involved in a lot of activities like funds management, development and so on. And the market is prepared to pay a premium for that. That’s a large cohort, close to 50% of the overall sector.
On the other side, we’re seeing more conservative groups, traditional rent-collecting groups, trading at a discount to NTA and providing a good source of income yield. They’re somewhat unexciting, but they are representing very good value for high quality assets. And are trading at a discount.
If you put the two together, the sector itself, in our view, looks expensive and as a source of income, it’s not convincing to us. It’s only 3.5 percent distribution yield.
So overall, the sector is not looking that interesting, but when you dig down into the sector, there’s certainly value there. And that’s where we’re focusing our attention.
Any new developments in different sectors?
The sector that we have traditionally liked has been convenience for retail. We like it because it’s about how Australians go about their daily needs. It’s very defensive and it’s a good source of income. So that’s a big component of our investing focus.
Another thing that is look interesting, is office. This is a time when there are opportunities to buy high quality office assets at half the value to replace these assets through the AREIT sector. So in the short term, it might not be going anywhere but ultimately construction costs have gone up a lot and it costs a lot more to build these assets now. And these are assets at the very high-quality end and you will see the market capture that difference or at least a large part of that difference over time.
We still like residential. Residential does have its challenges in terms of affordability, building approvals are low, but ultimately, we’ve got very strong population growth. We have a chronic undersupply of housing and the way we see to play residential is through that development piece, primarily through land. In this space we like Stockland and it is one of our largest holdings. They are in the process of extending their landbank through acquiring Lend leases, communities business. Also, Peet Limited, we added that into the portfolio last year. They’ve got the second largest landbank through their platform in Australia as well. We see this stock as really well positioned over the longer term.
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* The text has been edited for clarity.
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