Ironbark Karara Market Neutral Fund (PER7802AU) Report & Performance

The March quarter continued the reflationary trade which has been in play since late 2020, with GDP growth estimates on the rise, yield curves steepening, inflation expectations rising, commodities surging and value outperforming momentum and growth factors. This represents a phase change away from the ‘’value crash’’ experience of 2018 through until late 2020 and represents a welcome turn of events for investors sensitive to measures of intrinsic value.

The ASX returned 4.2% for the quarter and ended 38.3% above its close of a year prior. The reporting season was the one of the best seen (relative to expectations) for many years. Revenues were broadly in line, but costs were significantly lower than anticipated. The flow through of emergency cost measures taken last year will be harvested for a while longer and some COVID 19 specific costs will fall away. The caveat, however, is that there are signs of higher costs from many areas, including labour, ahead. The resulting improvement in margin saw consensus exceeded by 12%, with approximately 60% of companies reporting coming in ahead.

The Ironbark Karara Market Neutral Fund returned -1.74% (net) for the quarter, an underperformance of 1.76% when compared with the RBA cash rate return of 0.02% for the quarter.

Contributors

Centuria Capital Group
Acquisition of $178 million (in New Zealand dollar terms) Visy Facility located in Auckland (4.5% cap rate, 20 year WALE, 3% fixed reviews) for a new single asset unlisted fund on the Augusta platform. A $120 million Centuria Captial Group equity raising undertaken at $2.25 per share. Consensus 2021 financial year guidance upgraded for earnings per share (up 9% to 11.5-12.5 cents) and dividends per share (up 6% to 9.0 cents per share). The stock rallied over 10% from the equity raise. Pairs Trade: Home Consortium and Aventus Home Consortium successfully listed the HomeCo Daily Needs REIT and plans to further build out its funds management platform by launching a health, wellness and government focused fund in early 2021 as it works towards its target of $5 billion in assets under management.

The strategy sees it pivot from being a Large Format Retail landlord focused on repositioning the former Master’s assets to a fund manager. The investment manager forecasts Home Consortium may be able to deliver strong earnings growth of approximately 15% for the next few years underpinned by 28% assets under management compound annual growth rate within its funds, with minimal capital investment from Home Consortium until the 2024 financial year. The launch of HomeCo Daily Needs REIT provided the catalyst for Home Consortium to outperform Aventus through the quarter.

Pairs Trade: Mirvac and Stockland
Mirvac released a trading update in October, the highlight being sales rose 40% up from the prior quarter. Contracts exchanged over the first quarter of 2021 of 660 were up 40%. Mirvac has an additional 500 lots that were on deposit or conditionally exchanged at the end of the quarter (mainly WA, QLD, VIC master planned communities). Despite this strong level of activity, pre-sales declined from $971 million at June 2020 to $921 million, driven by 483 settlements (defaults at 1.9%), including higher price point apartments at Pavilions (Sydney Olympic Park). Other items of note include firstly, Mirvac will launch three new projects in the first half of 2021, including apartments at Green Square and secondly, Mirvac’s first build to rent development (LIV Indigo) is 27% let, which was said to be ahead of feasibility.

Stockland reported first quarter 2021 net deposits of 1,799, up 31% quarter on quarter. Sales momentum had slowed in August and September (average sales of 524 per month) after a strong June and July (average sales of 808 per month). The relatively weaker update saw Mirvac outperform Stockland.

Vicinity and Scentre Group
Vicinity’s quarterly update saw improvements across several key metrics: 1. Foot traffic for the week ending 3 November 2020 was 80% of the prior year (96% if excluding Victoria) and for the September quarter was 80% (94% if excluding Victoria), 2. Quarterly sales were down 32% (in line with the June quarter) but excluding Victoria were up 1.1% (versus down 14.7% in June quarter) 3. Cash collections for the September quarter improved to 56% (76% if excluding Victoria) of gross rental billings versus 49% in the June quarter.

Scentre Group have indicated at their quarterly meeting that 92% of stores are open and trading with more stores to open in the coming weeks. Third quarter rent collection of 85% includes rent collected prior periods so the better metric to focus on is year to date collections of 77%. 3,187 COVID 19 arrangements (including small medium enterprises and other) have been agreed with tenants, reflecting 89% of retailers. The key notable metric was occupancy of 98.4%, which deteriorated a further 0.40% from June 20 and the investment manager expects to continue to fall falling, leading to reduced leasing tension, lower rents and highlighting income uncertainty.

Both Scentre Group and Vicinity are facing the dual headwinds of COVID 19 and further online retail penetration. This is the reason the investment manager has a paired the positions. The investment manager thinks Vicinity is more undervalued than Scentre Group and the catalyst for Vicinity to outperform may be further COVID 19 outbreaks in NSW. Scentre Group has approximately 30% more exposure to Sydney and provides the opportunity and risk for the Fund.

Westpac and NAB
Westpac trailed NAB on the general bank recovery over the quarter. The curious aspect was that it was also trading cheaper on a per-share basis versus NAB. Westpac outperformed NAB late in the quarter as the gap began to close from where the investment manager put the trade on.