AUI Property Income Fund W (YOC0100AU) Report & Performance

The Fund provided a total return of positive 3.74% (after fees) for the December 2022 quarter. Performance was driven by increases in the value of the Fund’s underlying Australian Real Estate Investment Trust (A-REIT) holdings as well as the strong revaluation gain made by the Unlisted Managed Fund Elanor Warrawong Plaza Fund. These gains were partially offset by a minor valuation decrease of the directly held asset known as 70 Light Square, Adelaide following receipt of an updated annual independent valuation. Following a significant sell-down over the calendar year, the AREIT market rebounded over the final quarter of 2022, where the sector as measured S&P/ASX 200 Property Accumulation index comfortably outperformed the broader S&P/ASX 200 Index. During 2022, A-REITs have suffered as substantial increases in interest rates have weighed on investor sentiment. Uncertainty remains prevalent, however, with December seeing some of the early gains for the quarter given back following more hawkish commentary on further rate rises from the Reserve Bank of Australia (RBA). As of 31 December 2022, the A-REIT sector is trading at a c.4.5% Fiscal Year 2023 (FY23) estimated dividend per share yield and a substantial c.-17% discount to last stated Net Tangible Assets (NTA) which excludes Charter Hall Group, Centuria Capital Group, HomeCo (HMC Capital) and Goodman Group from the equation as these have a large portion of non-rental earnings/assets (i.e. development and funds management businesses) and their market pricing can deviate substantially from NTA backing.

The Fund provided a total return of negative 1.48% (after fees) for the September 2022 quarter. While returns from both the direct property and unlisted investment segments continue to remain as a whole positive, the overall performance of the Fund has been impacted by a decline in the listed A-REIT investments held, which account for c. 33% of the Fund’s total assets as of 30 September 2022. Against a backdrop of monthly interest rate rises, this calendar year the A-REIT sector has sold off approximately 28%. Listed market confidence is low as a result of recent interest rate moves which have roiled financial markets. The A-REIT sector is trading at a 5% FY23 estimated dividend per share yield and 10% premium to NTA. Or stated another way, a 27% discount to NTA if we focus on the more traditional A-REITs by excluding larger fund managers, Goodman Group and Charter Hall from the equation, whose revenues are driven by performance fees, funds management fees and development fees. The impact from rising interest rates has been well-documented and should be less of a surprise to listed property investors going forward. In response, this financial year the Fund’s exposure to A-REITs has been upweighted.

For the quarter ending 30 June 2022, the Australian listed property sector, as measured by the S&P/ASX 200 A-REIT Accumulation Index (A-REIT Index), returned negative 17.7% underperforming the broader equities market as measured by the S&P/ASX 200 Accumulation Index which returned negative 11.9%, as listed markets reacted to the changing economic back drop.

Over the year to 30 June 2022, A-REITs returned negative 12.3% compared to the broader market return of negative 6.5%. Despite recording a negative return over the quarter, Retail AREITs were the most resilient stocks, achieving a positive 3.0% return over the year. Alternative sectors such as Healthcare / Childcare (ASX: ARF) and Self-Storage (ASX: NSR) also performed positively over the last 12 months but like all sectors, A-REITs returns have been impacted. During the June quarter office AREITs were down negative 15.8%, followed by Diversified A-REITs which fell negative 20.4% while Industrial stocks (heavily influenced by global developer and fund manager, Goodman Group – GMG) were down negative 21.6%. The best performing property stocks for the quarter were BWP Trust (BWP) and Vicinity Centres (VCX) returning negative 1.2% and negative 1.6% respectively. The laggards for the period were fund managers, Centuria Capital (CNI) returning a negative 35.3% return and Home Consortium (HMC) which returned negative 34.6% for the quarter, continuing the prior falls of several fund manager focused stock falls within the A-REIT Index.

Five of the Fund’s directly held property assets were independently valued as at 30 June 2022, with a total net increase of $2.79 million or 5.63% from the properties’ book value immediately prior to valuation.

For the quarter ending 31 March 2022, the Australian listed property sector, as measured by the S&PASX 200 A-REIT Accumulation Index (A-REIT Index), returned negative 7.1% underperforming the broader equities market as measured by the S&P/ASX 200 Accumulation Index which returned 2.2%. Over the past twelve months, the A-REITs returned 17.7% outperforming the broader equities market which returned 15.0%.

Over the March 2022 quarter, Retail A-REITs led the market (AREIT Index) with returns of 1.3%, albeit this was somewhat skewed by the strong performance of Vicinity Centres (VCX), the only positively performing retail stock within the A-REIT Index for the quarter. Commercial office stocks were marginally down over the quarter (negative 1.6%), while Diversified A-REITs fell negative 8.3% and Industrial stocks were down negative 13.3% for the period (UBS, 2022). Individually, the best performing stocks were Vicinity Centres (VCX) and Charter Hall Long WALE REIT returning of 13.1% and 6.9% respectively over the quarter. The laggard for the period was Charter Hall Group (CHC) returning a negative 19.8% return for the quarter, reflective of wider fund manager focused stock falls within the A-REIT Index as bond yield rise.

Direct Property Transactions

 70 Light Square, Adelaide, SA – The Property Income Fund (Fund) settled the acquisition of 70 Light Square, Adelaide SA for $18.25 million on 5 November 2021. Located in the core of the Adelaide CBD, the property is a 4-star NABERS commercial office building with a net lettable area of 3,269m comprising four floors of office accommodation and ground floor retail. It is a multi-tenanted building prominently overlooking Light Square, one of the five parkland squares in the city and enjoys three sides of natural light. There is a mix of tenant sectors within the building including State Government, a patents company, information technology, flexible working, claims management and a café. At the time of acquisition, the property was 91% leased and expected to deliver an initial yield of 5.4% while targeting 6.2% when fully leased. The property was acquired reflecting a weighted average lease expiry of 3.1 years.

 134 King Street, Newcastle, NSW – On 21 December 2021 the Property Income Fund (Fund) settled the acquisition of 134 King Street, Newcastle, NSW for $7.55 million. Located in the heart of the Newcastle, the property has enormous repositioning protentional. It comprises retail/office accommodation over the ground floor and office over the three upper levels, with an additional enclosed rooftop meeting/function area and alfresco terrace. Overall, the property provides a total of c.1,880 sqm of lettable area and 19 basement car spaces. The building benefits from recent plant and equipment upgrades in 2016 including a new passenger lift and air-conditioning plant, installed at the time the rooftop extension was constructed. The property has a 3.5- star NABERS energy rating and a short-term lease, expiring in February 2022, which is over approximately 20% of the available leased area. The strategy is to upgrade and reposition the property to maximise its value and earnings potential

In general, we continue to retain a supportive view of the Australian commercial property as the market transitions through current pandemic inspired headwinds. Through its well diversified, actively managed portfolio, we believe the Fund is well positioned to provide investors with a consistent, sustainable level of distribution income over the medium to longer term.

The final quarter of the 2021 financial year ended with a resurgence of COVID-19 cases across Australia resulting in short lockdowns across much of the country. Compared to other developed countries, the vaccine rollout in Australia continues at a sluggish pace with 5.8% of the population fully vaccinated whilst a quarter of Australians have received a first dose. In comparison, in the United Kingdom and the United States those who have received a first dose sits much higher 67% and 55% respectively, with life in those regions seemingly returning to normal.

On the Australian economic front, retail sales growth was up a strong 25.0% for the 12 months to April 2021. In May, the Australian unemployment rate continued its rapid decline to 5.1% whilst job advertisements continue to grow. A pleasing result considering many economists were assuming a fiscal cliff to accompany the end of Government support measures. NAB Business Conditions and Consumer Confidence surveys continue to rise indicating a more positive outlook from the business community, although these results may be somewhat tempered once lockdowns are factored into the June release.