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Paradigm Group Investment Views: Paradigm Listed Property Trust Portfolio
March Activity in Response to Market Conditions

Listed property trusts are an asset class that own properties that are a central part of our life.

Many of the buildings we would normally visit everyday, be it office buildings, shopping centres, service stations, retirement living communities, storage facilities and homemaker centres are owned by large property trusts listed on the Australian Stock Exchange.

Similar to shares, the unit prices of listed property trusts have been hit hard over the last month as a result of the current uncertainty in response to COVID-19. The listed property trust index, which tracks the performance of Australian real estate investment trusts, fell 35.2% in March.

For the year ending 31 March 2020, the index fell 31.3%. Over the same period, the Paradigm Listed Property Trust model portfolio has added value by performing approximately 7% better than the index, depicted by the grey bar in the table below. This has been achieved through proactive management.

 

 

The impact of COVID-19 has affected subsectors of the property trust sector in different ways. From a transaction point of view, the portfolio was particularly active during March, given the extraordinary changes in both sentiment and volatility that occurred.

Of most relevance, the portfolio continues to be strategically underweight in shopping centre malls and overweight in select alternative real estate sectors with strong supply/demand characteristics such as seniors living and rural assets.

The portfolio has previously held an underweight position relative to the benchmark in retail assets but had still maintained a position in Scentre Group (Westfield centres) given its cheap valuation and asset quality. However, with the growing possibility of widespread mall closures in Australia due to COVID-19, we saw real risks for the group from a capital perspective and sold this holding.

At the same time, the portfolio increased exposure to property trusts with high levels of passive earnings, lower gearing, no retail exposure and attractive valuation upside. We thought you would be interested in some of these changes and the reasons why decisions are implemented.

 

NEW PURCHASES or ADDITIONS

 

Australian Unity Office Fund (AOF)

This trust owns a large portfolio of office assets, more suburban than city based, that are predominantly leased to Government tenants and businesses that are in defensive sectors. The fund has a strong balance sheet, low gearing and recently announced that forecast earnings are expected to experience only a small drop (<10%) as a result of current circumstance, whilst distributions would remain the same, placing the trust on a distribution yield of around 8% at its current price. So, we consider this a defensive investment with above average income provision.

Mirvac Group (MGR)

Mirvac is large diversified property trust with a broad asset mix including office, residential and quality suburban retail centres. With a market value in excess of $8 Billion and $950 million in cash and undrawn facilities, a unit price fall of just over 35% in the last month, has made it an attractively valued acquisition.

APN Industria (ADI)

APN Industria owns a diversified portfolio of 32 industrial assets, with a geographic and tenancy spread. The trust has recently confirmed its previous earnings and distribution guidance and represents excellent value at this time, with a forecast distribution of over 8% per annum based on the current unit price.

Centuria Industrial REIT (CIP)

In line with our preference towards the industrial sub sector at this time, Centuria is a large diversified industrial trust owning 48 separate assets with a total value of $1.6 Billion. More than two thirds of the portfolio has lease expiries beyond 2024 indicating the long-term nature of its leases. It has resilient and defensive tenants with 54% of portfolio income derived from tenants directly linked to the production, packaging and distribution of consumer staples and pharmaceuticals. Its largest tenants by income include companies such as Arnott’s, Woolworths, and Visy. With a share price fall of 30%.

GPT Group (GPT)

GPT is a proxy for the listed property trust sector, with assets spread across all major sectors with property assets totalling $15Billion. Units in GPT were traded over the month due to its price movements. Units were acquired early in March, but when significant uncertainty arose, the decision was made to exit the holding at around the same price only a week later. After a further week of disruption, units in GPT were reacquired at a price 14% lower than the previous week’s sale price. Whilst further volatility has occurred, we consider GPT a longer term holding due its scale and property quality.

 

SALES or REDUCTION IN HOLDINGS

 

Scentre Group (SCG)

Scentre Group is a well-known and well-respected giant of the retail sector, owning 42 Westfield centres. However, this sector has been hit extremely hard by the impact of COVID-19 with foot traffic and sales plummeting. The uncertainty surrounding the length of time that these centres will suffer is the main reason that the holding in this trust has been sold in full.

Rural Funds Group (RFF)

Rural was the best performing trust over March, remaining stable over this tumultuous period due to its rural exposure. Having performed so well, and as a result representing a larger exposure as a percentage of the portfolio, some profits were taken to reinvest in other opportunities that had arisen over the month. A core holding is retained.

Redcape Hotel Group (RDC)

Despite being a leading hospitality group owning 32 venues, with a robust balance sheet, COVID-19 has struck at the heart of this sector. The uncertainty surrounding the timing of the re-opening of these venues has resulted in the decision to sell this holding and stay out of this sector for the time being. Once greater clarity exists, this investment may be reconsidered.

Please feel free to contact your Paradigm Group advisor should you wish to discuss any issues in relation to your specific circumstances.

 

 

Mike Hawkins, Paradigm Group – Investment Committee Chair

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