PROPERTY A BEACON IN A VOLATILE WORLD. Adrian Harrington Head of Funds Management Folkestone 19 March 2018

Transcription

1 PROPERTY A BEACON IN A VOLATILE WORLD Adrian Harrington Head of Funds Management Folkestone 19 March

2 OVERVIEW OF FOLKESTONE 2

3 FOLKESTONE OVERVIEW Folkestone is an ASX listed real estate funds manager and developer providing real estate wealth solutions for private clients and select institutions FUNDS MANAGEMENT Offers listed and unlisted real estate funds to private clients and select investors with $1.5 billion in funds under management 1 Income, Value-add & Development Funds Listed A-REIT Fund & A-REIT Securities Fund/Mandates Office Retail Enterprise Parks Residential Hotels Seniors Living Government Childcare DIRECT BALANCE SHEET On-balance sheet activities focus on value-add & opportunistic (development) investments Underwriting & Co-investing in Funds Value-add & Development Investments Fees Acquisition, Leasing, Management & Performance Returns & Fees Development Profits, Pref Equity Interest, Mgt Fees 1 As at 31 December

4 NON-RESIDENTIAL PROPERTY 4

5 WHY NON-RESIDENTIAL REAL ESTATE IN THE PORTFOLIO? Real estate has provided a competitive return over the long term core real estate is expected to generate a lower return than equities but higher than bonds Real estate generates income from contracts and leases more stable income streams across the cycle approximately 70% of the total return from core real estate is derived from current income generated by contractual rent payments associated with tenant leases provides a hedge against inflation Brings diversification benefits to the mixed-asset portfolio real estate exhibit lower correlations with equities and bonds Active management in real estate can add significant value an owner can actively manage a portfolio through market, sector and or asset selection decisions an owner can make physical changes to an individual asset, increase its operational efficiency or alter its capital structure in efforts to increase returns 5

6 PUBLIC FOUR QUADRANT INVESTING EQUITY PUBLIC EQUITY Real Estate Investment Trusts (A-REITs) Real Estate Developers and Managers PRIVATE EQUITY Direct Real Estate Syndicates Open-ended Funds PUBLIC DEBT Corporate Bonds PRIVATE DEBT Senior Debt PRIVATE Commercial Mortgage-Backed Securities (CMBS) Mezzanine Debt Mortgage Funds DEBT 6

7 REAL ESTATE CAPITAL STACK Priority In Priority Out Equity Junior Mezzanine Mezzanine Debt Unsecured Subordinated debt Secured second ranking Subordinated debt Secured third ranking Senior Debt Bank debt Secured First ranking Conservative leverage Real estate debt exposure ranges from senior to junior mezzanine Higher up the capital stack, the greater the risk and higher the expected return 7

8 SOCIAL / DEMOGRAPHICS Sydney and Melbourne growing above trend Population forecasting has consistently fallen short ABS forecast s 1999 vs 2016: Australia m vs 24.2m Sydney m vs 5.0m Melbourne m vs 4.7m Inner city & middle ring population growth stronger than expected Greater Sydney Greater Melbourne Greater Brisbane Greater Adelaide Greater Perth Greater Hobart Greater Darwin ACT Total Cities Demographic Shift Cities Population at 30 June ,005,358 4,641,636 2,349,699 1,326,354 2,066, , , ,294 16,152,336 Net Interstate Migration Change on Previous Year No. % 82, ,770 41,135 9,371 27,428 1,786 1,147 5, , Infrastructure has not kept pace Pressure on social services childcare/aged care/schools/medical especially inner & middle ring Creates social infrastructure real estate investment opportunities WA -7,703 NT -2,696 QLD 11,581 NSW -11,349 SA -6,398 Vic 16,699 8

9 $bn CAPITAL FLOWS Total Australian Non-Residential Investment Activity: Non-Residential Foreign Investment In Australia By Country: 2017 $bn Source: Cushman & Wakefield Strong investor interest continues - $34.1 billion in sales in 2017, up 14.0% on 2016 levels Source: Cushman & Wakefield Foreign investment of $12.2 billion 36% of all transactions Asian lead the investments - $8.4 billion driven by Singapore and China 9

10 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 % NON-RESIDENTIAL REAL ESTATE PERFORMANCE Non-Residential Real Estate Yields: Drivers of Non-Residential Property Investment Returns: Retail Office Industrial Other 10 Year Bond Yields Lead up to GFC Source: MSCI/PCA Cap rates at record lows difference between 2007 and now is spread between bond yields Source: MSCI Returns have been driven by cap rate compression rather than income growth 10

11 NON-RESIDENTIAL REAL ESTATE PERFORMANCE Asset Class Returns: Year to 31 December 2017 Non-Residential Real Estate Sectors: Total Returns 2016 and 2017 Source: MSCI Unlisted real estate funds were the second best performing asset class Source: MSCI Other real estate healthcare, carparks etc. outperformed in both 2016 and 2017 Retail lagged for the 2 nd year in a row 11

12 Melbourne Sydney Hobart Canberra Adelaide Brisbane Perth Darwin OFFICE 25.0 CBD Vacancy Rate: July 2017 and January 2018 Jul-17 Jan-18 Sydney CBD Effective Rents: Source: Property Council of Australia Source: JLL Sydney and Melbourne have low vacancy rates Rent growth increasing across both prime and secondary buildings 12

13 RETAIL Retail Sales: Retail Sales By Type: January 2018 Source: ABS, ANZ Research Source: ABS, ANZ Research Retail sales remain soft Retail sales vary by category department stores continue to drag on the sector 13

14 TECHNOLOGY CHANGING FACE OF RETAIL Challenges the economics of established business models Forces businesses to change their business models, often to their detriment Operates a broad ecosystem of products and services and doesn t only make money selling its own products Amazon in Australia, it is not going to be as easy as the US Most of the retailers there rolled over but they won t here. Gerry Harvey: Harvey Norman News.com.au 26/04/17 "We have been expecting this for a long time. We have a healthy sense of paranoia. We are not complacent around the competitive risks." Rob Scott: Next CEO of Wesfamers, SMH 20/04/17 14

15 RETAIL Specialty Retail Sales By A-REITs: Specialty Sales By Type And A-REIT: Feb 2018 Source: Company Reports/Morgan Stanley Research Comparable specialty sales growth moderated for 4 out of 5 retail exposed A-REITs Source: Company Reports/Morgan Stanley Research Specialty apparel sales remain under pressure whilst growth from retail services remains strong 15

16 LOGISTICS REVOLUTIONING INDUSTRIAL PROPERTY Last Mile Delivery Connecting With The Customer Driving a Shift Towards Super-Sized Distribution Facilities in Key Locations 16

17 RESIDENTIAL PRICES AND YIELDS Australian House Prices: Major Capital Cities: Australian House Yields: Major Capital Cities: Source: Westpac Sydney house prices negative (-2.0% for the year) for 1 st time since 2012 Source: Corelogic. Morgan Stanley Research Rental yields are slowly lifting from record lows Melbourne house prices continue to hold up (+6.7% for the year) 17

18 RESIDENTIAL - LOANS Investor Borrowing By State: Investor and Interest Only Loans: Source: ABS, Morgan Stanley Research Investor activity has slowed but remains elevated in NSW Source: APRA, Morgan Stanley Research Macro-prudential measures have lowered the share of investor and interest-only loans 18

19 RESIDENTIAL - APARTMENTS Housing Construction By Type: Apartment/Townhouse Approvals: Source: ABS, Morgan Stanley Research Apartments have contributed most of the uplift in Australia's residential building activity Source: ABS/ANZ Apartment market continues to remain elevated, although volatile 19

20 REAL ESTATE SOCIAL INFRASTRUCTURE GOES CORE Types of real estate social infrastructure education early learning, schools, tertiary/vocational, student accommodation health medical, hospitals, specialist centres seniors living manufactured housing, retirement villages, aged care social housing transport bus & train stations, park & rides, car parks government accommodation police stations, court houses, prisons, etc. Benefits of real estate social infrastructure include longer leases than traditional real estate assets net or triple net leases (operator/tenant pays outgoings) secure (often government backed) cashflows low correlation to other real estate and non-real estate assets Drivers of demand for real estate social infrastructure demographic and social changes governments looking to private sector to fund yields tend to be higher (although gap is narrowing) some sectors have undersupply and/or existing stock is obsolete opportunities to manufacture new product 20

21 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Mar-17 CHILDCARE - SUPPLY Number Of Children Utilising LDC Vs. Number Of LDC Centres In Australia: LDC Participation Rate Increases: ,000 Children (LHS) LDC Centres (RHS) 7, ,000 7, ,000 6, ,000 6, ,000 6,400 6, ,000 6, ,000 5, ,000 5, Source: ACEQUA, Folkestone, 2018 Source: Canaccord, Folkestone, 2018 Recent increase in supply beginning to moderate Catch-up in supply due to increased usage up 24% since 2010 but supply only increased by 18% Participation rates continue to increase: increasing female workforce participation Improving quality of service On-going government funding 21

22 FET TOOWOOMBA CHILDCARE CENTRES Toowoomba Centre Name Property Address Suburb Tenant Goodstart Highfields 7 Gladswood Drive Highfields Goodstart Lead Child Care Bridge Street Toowoomba Leading Education Goodstart Toowoomba 221 Bridge Street Toowoomba Goodstart Goodstart Toowoomba 8 Healey Street Toowoomba Goodstart Goodstart Middle Ridge Cnr Spring & Ramsay Streets (3 Oldfield St) Toowoomba Goodstart Near Toowoomba Centre Name Property Address Suburb Tenant Goodstart Gatton 132 Railway Street Gatton Goodstart Laidley Central Child Care Centre 21 Hope Street Laidley Paisley Park 22

23 SENIORS LIVING - FUTURE TRENDS Retirement Village Trends sector consolidation larger villages with bigger apartments more lifestyle facilities - pool, gyms, café/restaurants, cinema, day spa vertical developments increasing/harmonising regulation Aged Care Trends sector consolidation greater emphasis/funding on home care vs residential care move to Consumer Directed Care Federal budget constraints putting more pressure on user-pays Retirement Village Convergence Home Care Residential Aged Care Customers Expectations Will Change As Customers Are Becoming: more educated more discerning more demanding have more money with more choice Convergence Co-location co-location of retirement & aged care Consumer Directed Care 23

24 A-REIT MARKET 24

25 TGP AJD GDI IDR RFF PLG AOF LEP CHC ABP ARF NSR HPI GMG CMW CMA GOZ ERF BWP CIP INA SCP FET DXS MGR WFD CLW APZ GPT CDP AVN IOF CQR SCG VCX SGP VVR INM % A-REIT VARIATION OF PERFORMANCE A-REIT 1 Year Returns: To 28 February Folkestone Maxim Held A-REITs* Other A-REITs Source: IRESS *Excludes Real Estate Managers & Developers Securities held by the Fund Wide variation in individual security performance reinforces case for active security selection in the sector 25

26 Industrial Diversified Commercial Specialised A-REITs Retail % (p.a.) % A-REIT RELATIVE PERFORMANCE 15.0 A-REIT Vs Equities - Total Returns: To 28 February 2018 S&P/ASX300 A-REIT Accum Index S&P/ASX300 Accum Index 15.0 A-REIT Sub-Sector Performance: To 28 February Month 1 Year 3 Years Month 1 Year 3 Years 5 Years 10 Years Source: UBS Source: UBS A-REITs underperformed in the month to 28 February 2018 A-REIT sub-sector performance showed wide variation over short term Industrial was the best performer in the past year driven by limited supply and increased demand for assets in metropolitan locations that could potentially service online retailing Retail underperformed due to concerns about the challenging retail environment and the arrival of Amazon 26

27 A-REIT VALUATIONS A-REIT Price to NTA : February 2018 A-REIT Price to NPV: February 2018 Source: JP Morgan Source: JP Morgan A-REIT pricing is fair at present A-REITs currently trading on: circa 10.6% premium to NTA versus 16% premium historically circa 8.0% discount to NPV versus 3% discount historically 27

28 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 % A-REITs VS BOND YIELDS A-REITs vs Bond Yields: January 2016 February 2018 A-REIT Sector EPS and DPS Yields Vs. 10 Year Australian Bond Yields: February 2002 February Yr AU Bond Yield A-REIT EPU Yield A-REIT DPU Yield Source: IRESS/Macquarie Bank Source: Bloomberg A-REITs have strong correlation to 10 year bond yields Low bond yields and wide spread of A-REIT DPU and EPU (well above average) is a key driver of A-REIT performance to February 2018 A-REITs underperformed in the last twelve months when bond yields increased substantially but in recent months bond yields have stabilised and A-REIT returns have followed suit 28

29 FOLKESTONE MAXIM A-REIT SECURITIES FUND PORTFOLIO WEIGHTING Portfolio Weighting: As at December 2017 Real Estate Developers & Managers Social Infrastructure A- REITs Portfolio (%) Index 1 (%) Relative Weighting Industrial A-REITs Underweight Retail but Overweight Industrial FUND THEMATICS Other Specialised A-REITs Office A-REITs Retail A-REITs Diversified A-REITs Cash TOTAL Underweight Office and Diversified but Overweight Social Infrastructure & Specialised A-REITs 1 S&P/ASX 300 A-REIT Index 29

30 A-REIT OUTLOOK Markets are likely to continue to face a period of great uncertainty due to the following events: rising interest rates and bond yields in key global markets led by US greater focus on cyclicals over defensive stocks continued short-term investing horizon in the sector by general equity and hedge funds concerns around the health of the retail and residential sectors Under these uncertain times ahead, our investment strategy is to focus our exposures to high quality assets in entities run by quality management with a strong balance sheet (gearing around 30%) Accordingly we will focus on and target exposures to securities which include: Goodman Group, Mirvac Group, Dexus Property Group by taking advantage of the volatility and buying when their pricing becomes attractive whilst restricting our non-index exposures to those sectors which we believe will provide growth opportunities (child care, aged care and agriculture) 30

31 REAL ESTATE DEBT 31

32 LEVERAGE Why Use Leverage? allows for greater diversification can put more equity to use across multiple investments often enhances returns higher leverage equals less equity and therefore potential greater return on equity tax advantages negative gearing Asset level considerations the point in the cycle - what is the likelihood of the asset s price increasing or decreasing in the coming years location how deep is the market if you want to exit, what are the supply and demand fundamentals? quality of the tenant covenants what is the likelihood of tenant default? lease expiry profile are there any vacancies or upcoming lease expiries? quality of an asset s income streams can the cashflow from the asset adequately cover the debt costs, what are the lease structures and rent review mechanisms in the leases? investment hold period is the asset being held for short-term trading or long-term investment? impact on operational flexibility - cash flow escrows, deposit requirements, prepayment lockouts and penalties In structuring and managing the debt, factors to consider include: cost of debt - the higher the leverage, typically the higher the cost of the debt that the lender requires to compensate for the increased leverage risk debt covenants the maximum loan to value ratio and minimum interest cover ratios that the lender will require type of debt interest only or principal and interest? source of debt traditional bank lending or capital markets medium term notes, CMBS etc? capital stack is the debt just senior first ranking or has the capital stack been layered to allow a combination of senior and mezzanine debt duration of the debt - short or long-term debt? hedging profile - how much of the debt is at fixed or variable interest rates? 32

33 LEVERAGE The impact of leverage using 30%, 50% and 65% gearing on a real estate asset that has been acquired for $1 million Two key points: 1. leverage magnifies the creation or loss of value; and 2. the volatility of an investor s equity rises as leverage increases. 33

34 RISK MANAGEMENT Don t take the conventional wisdom approach to evaluating risk when you evaluate risk, expect the unexpected think broadly and expansively about events that can impact your probable outcome at times there is a rush to herd mentality in pricing assets. The seemingly safest position today may actually be far riskier than might be perceived by the herd mentality. An example is core real estate in some of the gateway global cities is currently being priced to perfection 34

35 FOLKESTONE REAL ESTATE IQ Real Estate IQ provides our latest thinking on real estate to assist you in navigating the world of real estate markets and issues, to make more informed investment decisions. Visit: 35

36 DIRECTORY FOLKESTONE ASX Code: FLK Website: ABN: Level 14, 357 Collins Street Melbourne VIC 3000 T: Level 10, 60 Carrington Street Sydney, NSW 2000 T: INDEPENDENT BOARD OF DIRECTORS Garry Sladden Non-Executive Chairman Mark Baillie Non-Executive Deputy Chairman Greg Paramor AO Managing Director Ross Strang Non-Executive Director COMPANY SECRETARY Scott Martin Telephone: INVESTOR RELATIONS Lula Liossi Telephone: lliossi@folkestone.com.au REGISTRY Boardroom Pty Limited P.O. Box R67, Royal Exchange NSW 1223 Telephone: or enquiries@boardroomlimited.com.au DISCLAIMER: This presentation has been published for information purposes only. The information contained in this presentation is of a general nature only and does not constitute financial product advice. This presentation has been prepared without taking account of any person's objectives, financial situation or needs. Because of that, each person should, before acting on this presentation, consider its appropriateness, having regard to their own objectives, financial situation and needs. You should consult a professional investment adviser before making any decision regarding a financial product. In preparing this presentation the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which has otherwise been reviewed in preparation of the presentation. The information contained in this presentation is current as at the date of this presentation and is subject to change without notice. Past performance is not an indicator of future performance. Neither Folkestone Limited, nor any of their associates, related entities or directors, give any warranty as to the accuracy, reliability or completeness of the information contained in this presentation. Except insofar as liability under any statute cannot be excluded, Folkestone Limited and its associates, related entities, directors, employees and consultants do not accept any liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this presentation. If a product managed by Folkestone Limited or its associates is acquired, Folkestone Limited or its associates and related entities may receive fees and other benefits. The author of this presentation does not receive commissions or remuneration from transactions involving the financial products mentioned in this presentation. 36