Resolution Capital Global Property Secs (WHT0015AU) Report & Performance

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of 3.2% for the month ended 31 July 2023. All regions posted positive total returns as evidence of disinflation and rhetoric from central bankers has become less hawkish. Lower terminal rate expectations benefited vehicles with higher financial leverage in July, as evidenced by the outperformance of both Continental Europe and the office sector.

U.S. REITs modestly underperformed the global index, returning 2.8% in local currency terms. Despite the lowest CPI print since March of ’21, the Federal Reserve hiked rates an additional 0.25%. Portfolio exposure to the U.S. contributed positively to relative returns due to stock selection.

Continental Europe was the top performing region returning 9.0% in local currency terms. The market responded positively to signs of disinflation, suggesting that the end of the ECB rate hike cycle could be on the horizon. With elevated leverage in the region, a pause in rate hikes would provide much needed relief. The portfolio’s underweight position detracted from relative returns.

In contrast, Hong Kong was the weakest region, returning 0.4% in local currency terms. The post-Covid reopening trade in China has disappointed thus far, with consumer spending remaining subdued. Overweight portfolio exposure contributed negatively to relative returns, albeit modestly.

Except for self-storage, all property sectors posted positive returns in July.

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of 2.8% for the month ended 30 June 2023.

The U.S. was the top performing region returning 4.8% in local currency terms. The market responded positively to the U.S. Federal Reserve pausing its interest rate hiking cycle and ongoing resilience in the broader economy. The portfolio’s overweight position to the region contributed positively to relative returns.

In contrast, the U.K. was the weakest region, returning -7.3% in local currency terms. REITs in the region were pressured as the Bank of England raised interest rates higher than anticipated by 0.5% to 5%. Meanwhile inflation remains stubbornly high in the region, signalling further hikes are likely in order to return it to targe t levels. The portfolio’s overweight position to the region detracted from relative returns.

With the exception of industrial, all property sectors posted positive returns in June. Data centres was the strongest performing sector returning 7.2% in local currency terms as investor enthusiasm persisted driven by robust secular tenant demand. Canadian office REIT Allied Properties (AP) capitalised on investor appetite, selling its Toronto urban data centre portfolio to Japanese telecommunications operator KDDI Corporation (9433) for C$1.35bn, an estimated low-4% cap rate and a 10% premium to book value. The portfolio’s underweight position detracted from relative returns.

Industrial was the weakest performing sector, returning -1.1% in local currency terms. The sector was negatively impacted by decelerating tenant demand and an elevated supply backdrop. The portfolio’s underweight position contributed positively to relative returns.

Office was in the middle-of-the-field, returning 4.1% in local currency terms. Performance diverged by region with U.S. strength diluted by weakness elsewhere. Late in the month, U.S. office REIT SL Green (SLG) sold a 49.9% stake in 245 Park Avenue, New York to unlisted Japanese developer, Mori Trust, for $2bn ($1.1k/sqft), which r eflected a low-4% cap rate. The valuation was meaningfully higher than public market implied values for A-grade quality assets and drove a re-rating in depressed valuations.

Elsewhere, Australian office REIT Dexus (DXS) sold an A-grade asset, 44 Market Street, Sydney, for $393m or AU$12.8k sqm (US$797/sqft) to APAC focussed investment firm, PAG. The deal reflected a meaningful 17% discount to its December valuation. The portfolio’s underweight position to the office sector detracted from relative returns.

There were several other notable REIT announcements during the month.

Crime and safety issues plaguing San Francisco metro saw several landlords cease payments on secured debt amidst challenging operating conditions. Transatlantic mall REIT Unibail Rodamco Westfield (URW) along with its JV partner Brookfield, handed Westfield San Francisco to its lender. U.S. hotel REIT Park Hotels (PK) also ceased payments on a $725m CMBS loan secured by two San Francisco hotels maturing late 2023 amidst refinancing negotiations.

U.S. life science REIT Alexandria (ARE) continued to execute its capital recycling program to fund development, executing dea ls above its public implied value. ARE sold a portfolio of five non-core assets in greater Boston for $365m ($852/sqft) reflecting a 5.2% cap rate.

U.S. REITs also notably capitalised on private funds selling assets to meet investor redemptions. U.S. industrial REIT Prologis (PLD) acquired a portfolio of industrial assets from Blackstone’s private REIT (BREIT) for $3.1bn ($ 221/sqft). The valuation reflected a cap rate of 4.0%, or 5.75% marking the rent to market. Elsewhere, U.S. single -family residential REIT, Invitation Homes (INVH) acquired a portfolio of ~2,000 single-family residential homes from Starwood Capital Group for $800m ($400k per home). The valuation reflected a cap rate of roughly mid-4%.

European senior housing portfolio holding Aedifica (AED) announced a dilutive two for eleven rights issue at €52 per share, equivalent to 18% of shares outstanding, aiming to raise €380m. AED indicated the proceeds will be used to reduce debt, and fund future development and investment opportunities.

Australian retail REIT Vicinity Centres (VCX) continued to recycle assets to fund its mixed-use development pipeline. VCX sold a 50% interest in Broadmeadows Central, located in Victoria for $135m reflecting roughly a mid-6% cap rate, and a premium to book value.

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of -3.8% for the month ended 31 May 2023. All regions posted negative returns over the month, except for Japan, as the takeout of First Republic Bank by JP Morgan Chase at least temporarily resolved the U.S. banking crisis, with focus shifting toward U.S. government debt ceiling negotiations in Washington.

U.S. REITs modestly outperformed the global index, returning -3.2% in local currency terms as the market digested persistent inflation and another 0.25% interest rate hike by the Fed, coupled with commentary hinting at the potential conclusion of the end of the hiking cycle. Overweight portfolio exposure to the U.S. contributed positively to relative returns.

Japan was the top performing market in the global index, returning 0.1% in local currency terms, and the portfolio’s underweight position detracted from relative returns. Logistics REITs Nippon Prologis REIT (3283) and GLP J-REIT (3281) raised ~$200m & ~$240m of equity in May to acquire logistics facilities.

Hong Kong was the weakest region, returning -8.9% in local currency terms, and the portfolio’s overweight position to the region detracted from relative returns. REITs in the region were affected by multiple factors in China, including a softening Chinese property market and declining manufacturing production.

Continental Europe returned -8.9% in local currency terms, and the underweight position contributed positively to relative returns. The European Central Bank (ECB) raised its marginal lending rate and signalled for additional raises after headline Eurozone inflation accelerated through April, increasing pressure on troubled REIT balance sheets in Europe. Several highly levered European REITs made progress on balance sheet remediation in May through equity raises, asset sales or a combination of both. Castellum (CAST) launched their previously announced SEK 10bn (~US$920m) rights issue which aims to lower net debt/EBITDA to ~11x from 13x and reduce LTV from 44% to 38%. CAST also reported the disposal of 20 properties for the year to date, for SEK 2.3bn (~US$210m) in line with book values.

Meanwhile, German landlords Vonovia (VNA) and Aroundtown SA (AT1) disclosed asset sales for the purpose of deleveraging, with VNA disposing of five newly built assets to CBRE for €560m and AT1 reporting €320m of disposals YTD at close to book value.

Unibail-Rodamco-Westfield (URW) completed two sale transactions during the period, including the disposal of Westfield Brandon, a U.S. shopping centre in Florida for $220m representing a 10% net initial yield and a 4% discount to the most recent valuation. Proceeds from the asset sales will be used to reduce debt.

All property sectors posted negative returns in May, except for data centres.

Data centre REITs was the strongest performing sector returning 3.3% in local currency terms as investors were buoyed by signs of ongoing, robust secular tenant demand. Chipmaker NVIDIA Corporation (NVDA) reported strong first quarter earnings with bullish AI growth projections which have positive implications for future total data centre demand. The portfolio’s underweight position to data centres detracted from relative returns.

Retail was the weakest performing REIT sector, returning -5.8% in local currency terms. The sector was negatively impacted by concerns over tenant credit and a slowdown in retail sales.

Overall, real estate transaction activity remains meagre providing limited evidence for valuers, lenders and investors on which to rely.

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of 2.0% for the month ended 30 April 2023. All regions posted positive returns in the month except for Hong Kong as there was increased clarity regarding the impact and reach of the recent banking crisis.

The urgency with which the U.S. government and The Fed backstopped deposits and a proactive resolution from Swiss policymakers to contain the potential Credit Suisse turmoil appears to have mostly assuaged near-term liquidity and solvency concerns. Inflation appears to possibly be peaking across most global economies, and there has been increased confidence that rate hikes from central banks are nearing a pause. The UK was the top performing market in the global index, returning 6.3% in local currency terms, and the Portfolio’s overweight position benefitted relative returns. The region reversed course in April after underperforming the rest of the world by more than four percentage points in March. Clean balance sheets in the UK relative to Continental Europe are a tailwind for capital flows in a turbulent environment. The U.S. had positive returns that modestly underperformed the global index, returning 0.8% in local currency terms. U.S. CPI for the month of March was reported at 5%, suggesting The Fed is nearing an end to its current hiking cycle.

The operational outlook for U.S. REITs is solid with constructive commentary by management teams in the current REIT earnings season. Office has been a negative standout that has weighed on the broader U.S. region. Portfolio exposure to the U.S. contributed positively to relative returns due to stock selection. Hong Kong was the weakest region, returning -0.1% in local currency terms, and the Portfolio’s overweight position detracted slightly from relative returns. After outperforming other regions in March, Hong Kong slid on a relative basis in April on softness in office and luxury residential.

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of -3.9% for the month ended 31 March 2023. All regions posted negative returns in the month except Hong Kong as the collateral damage of central bank interest rate hikes extended to the banking sector causing heightened liquidity and solvency concerns.

Echoing the 1980s Savings & Loans crisis, the failure of Silicon Valley Bank and Signature Bank in the U.S., and the bail-out of Credit Suisse by UBS in Europe, highlighted the fragility of banks with weak capital structures and concentrated asset exposures. The consequences for REITs will take time to comprehend but we anticipate tighter lending conditions and reduced credit availability for those property sectors with weak operating fundamentals, notably U.S. office.

Hong Kong was the strongest region, returning 0.6% in local currency terms. REIT earnings recovery expectations are supported by economic and behavioural trends, which highlighted a sharp rebound in travel and consumption and improving residential sales. Our overweight exposure to Hong Kong contributed positively to performance.

The U.S. modestly outperformed the global index, returning -2.8% in local currency terms. The Portfolio’s overweight position benefitted relative returns. The Fed delivered another 25bps rate hike, as U.S. policymakers balanced taming inflation with calming concerns regarding instability in the banking sector. In light of the banking turmoil, relative strength was broadly observed across U.S. REITs which satisfied three key characteristics: (a) defensive income streams, (b) low leverage, and (c) low exposure to technology/life-science oriented markets such as San Francisco. In turn, our exposure to single-family residential, manufactured housing, seniors housing and net lease sectors contributed positively to performance. Continental Europe was the weakest region, returning -12.4% in local currency terms.

Troubles in the banking sector added to the challenges facing highly levered European REITs. Remedies to cure elevated leverage and refinancing risk via common pathways (e.g., asset sale or equity raise) are hindered by the higher cost of capital environment. The wave of dividend reductions or suspensions and utilisation of script dividends continued in March. Announcements included German residential REITs Vonovia (VNA) and LEG Immobilien (LEG), and diversified REITs Aroundtown (AT1) and Immofinanz (IIA).

Our underweight exposure to Europe contributed positively to performance. Most property sectors posted negative returns in March with the exception of data centres, self-storage and industrial.

The FTSE EPRA/NAREIT Developed Index (AUD Hedged) produced a total return of -3.6% for the month ended 28 February 2023. All regions apart from Japan posted negative returns in the month of February. REITs have delivered mixed earnings results with positive Q422 results preceded by 2023 guidance that suggests an expected slowdown in the latter half of the year, with rising operating expenses and interest costs posing a challenge to earnings in 2023.

Japan was the strongest region, returning 2.3% in local currency terms. Japanese stocks rallied late into February after Bank of Japan Governor nominee Kazuo Ueda expressed support for the current ultra-loose monetary setting, signalling interest rates are unlikely to rise in the short to mid-term. Our underweight exposure to Japan detracted from performance.

The U.S. underperformed the global index, returning -4.8% in local currency terms. Positive economic and employment data released in February suggests that the Fed’s efforts to control inflation have been inadequate, leading to a greater likelihood of interest rates staying higher for longer. Sticky inflation concerns and decelerating growth from earnings combined for downward pressure on the U.S. Our overweight exposure to the U.S. detracted from performance.

Hong Kong was the weakest region, returning -6.1% in local currency terms. Geopolitical concerns and uncertainty surrounding Chinese business recovery led to a consolidation in Hong Kong equities throughout February after a strong post-Covid reopening rally since November of last year. Our overweight exposure to Hong Kong detracted from performance.

All property sectors apart from self storage posted negative returns in February.

Self storage was the strongest performing sector during February, returning +1.7% in local currency terms after optimistic growth guidance was delivered by the sector. However, earnings results were overshadowed by Public Storage’s (PSA) rejected informal $11b takeout offer to acquire Life Storage (LSI) at a 17% premium to LSI’s unaffected share price, with indications that PSA may improve the offer. Our overweight exposure to the sector added to performance.

The data centre sector was the weakest performer during the month, returning -7.4% in local currency terms. Despite strong bookings with record backlogs, the sector underperformed due to flat earnings guidance delivered by Digital Realty (DLR) which was negatively impacted by rising financing costs, while Equinix Inc’s (EQIX) margins declined because of increasing electricity costs. Our nil exposure to DLR and underweight exposure to the sector contributed positively to performance.