SGH Property Income Fund – September 2024 Quarterly Update
Grant Berry, Lead Portfolio Manager
Fund Performance During September Quarter*
The September quarter was a strong quarter for the AREIT sector and, in particular, the SGH Property Income Fund, which delivered a return of around 18% net to our investors. The macro-environment was quite positive for the AREIT sector. We saw bonds rally a little bit over the course of the quarter, while at the end of the quarter, we saw the US Federal Reserve begin its interest rate reductions with a 50 basis point cut.
We also had reporting season over the quarter. FY24 results came in aggregate in line with our expectations, while FY25 guidance was a little bit below our expectations, not by much, and that was driven by some asset sales dilution and a little bit higher interest rate expense. In terms of contributors to our portfolio, we had strong contributors from Stockland, Vicinity Centres and GPT Group while we actually only had one detractor, that being the Australian Unity Office Fund.
Portfolio Positioning
In terms of the SGH Property Income Fund, firstly, it’s about investing in real assets and real property for income at attractive valuations. We have seen a strong rally. Notwithstanding that rally, the portfolio is still trading at a discount to its net tangible asset backing at the end of the quarter of around 8%, and a discount to its net asset value, that’s our net asset value, or as we refer to as NAV, of around 12%.
In terms of its positioning, we have a good weighting towards convenience retail. We see that as attractively priced and very defensive. We continue to like the large destination malls, and we have a good weighting there.
Having said that, there are a number of the larger REITs in that space where we have been reducing our position somewhat. We’ve been increasing our weighting towards the office REITs over the course of the last six months or so, because, in the A-REIT sector, at least, we see that as bottoming out and very deep value and a good source of income yield. What we’re also seeing, as you would imagine in a rally, it tending to flow through into the larger REITs first, and our view is that that’s left behind the smaller REITs where there’s more value, and we see the market broadening out over time, so we’ve been taking some profits in the larger REITs and cycling them down into some of the smaller REITs and holdings.
Changes in Portfolio Positioning
Well, interestingly, we continued on with what we were doing in the prior quarter. That is, we were selling down our weighting in Stockland and Scentre Group, both very good quality groups, but they’ve had a strong rally, and we’re starting to see value in other names. We increased our weighting to GPT Group. We continued with that into this quarter, as well as Chaterhall Social Infrastructure REIT, and we actually exited Ingenia Communities Group.
Outlook
Well, firstly, the portfolio has had a strong performance in the last 12 months. I mean, going back over 12 months, we had interest rates on the ascent, and we’re now at the, at the cusp of interest rate cuts, and it has started in Europe and now in the US, so more it is more of a tailwind, and that’s positive for REITs.
We’re seeing the top line income growth for the AREIT sector being quite positive. We saw that through reporting season. In fact, it accelerated.
We’re seeing the growth outlook for REITs looking better than financials as an example. The multiple still looks quite reasonable. So, we think that overall, the outlook for our portfolio in the medium term looks quite favourable.
One Metric You Will be Following Closely in the Next Few Months
A metric that I would be closely looking at would be inflationary bonds. Currently, the yield is around that 160 to 170 basis points, which is quite high, certainly quite high to where it’s been over the last 10 years. Now, if that was to rally down, I would see that that would provide the opportunity for the REIT sector’s multiples to further expand, providing an upward growth profile being capital appreciation.
* The text has been edited for clarity.
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