UBS Clarion Global Property Securities Fund. Quarterly investment report to 31-Dec-17

Transcription

1 UBS Clarion Global Property Securities Fund Quarterly investment report to 31-Dec-17

2 Performance comments Before fees and expenses, the portfolio rose by 4.87% over the quarter, outperforming its benchmark. Positive absolute performance was enhanced by favorable relative performance for the month, quarter and year. Relative performance finished the year strong with +160 basis points of favorable attribution during 4Q, driven by a combination of favorable stock selection and sector allocation. Stock selection during the quarter was strong in the U.S. healthcare, residential, lodging, self-storage and technology property types, as well as in Hong Kong (via shopping center company The Link REIT) and in Continental Europe (via positions in German residential companies Buwog and LEG Immobilien, Paris office company Gecina and French retail landlord Klepierre). In the U.S. healthcare sector, performance benefited from our preference for medical office buildings and lab space and cautious view of companies exposed to the weak skilled nursing sector. In the U.S. residential sector, we benefitted from investment in the single- family home for rent and manufactured housing business while avoiding the student housing REITs. In the lodging sector, we added value via operating companies Marriott and Hilton Hotels, which are benefitting from improving demand and low capital expenditure needs. Positioning in Europe added relative value in both the U.K. and Continent, each of which outperformed during 4Q with high single-digit total return. Positioning in the German residential sector benefitted from M&A activity, as Vonovia announced in December that it would acquire Austrian-based Buwog in an all-cash deal at a sharp premium to its then share price. M&A is an accelerating theme among listed property companies given the persistent discount to private market values and the wall of capital seeking investment in the real estate asset class. Private equity alone has an estimated $244 billion of dry powder looking for investment in real estate, which is at a record level, with another $185 billion in the fundraising process. Sector allocation also added value for the quarter, driven by portfolio positioning in the U.S., especially the overweight to U.S. malls. Investments in the mall sector came alive during November as the result of a string of M&A activity commencing with a bid by a unit of Brookfield Asset Management for the 66% of General Growth Properties that it does not already own. General Growth Properties is the second largest mall REIT in the U.S., an owner of over 125 primarily Class A malls and shopping centers. News of activist investors taking stakes in mall REITs Macerich and Taubman Centers added fuel to the investment thesis that listed mall companies have been oversold, are cheap relative to asset value and ripe for consolidation. General Growth, Macerich and Taubman were up +15%, +21% and +33%, respectively, for the quarter (in USD). The mall bid went global with the subsequent announcement that Paris-based Unibail would acquire Australian-based Westfield Corp in a 65%/35% stock/cash deal. Sector allocation was also positive in Hong Kong and Europe. % Return (Gross) Fund 1 Benchmark* Difference 3 months year years (0.66) 5 years Calendar Year to Date Since inception (07/06) Performance figures are gross of ongoing fees and expenses. After fees and expenses, the portfolio rose by 4.63% over the quarter, outperforming its benchmark. % Return (Net) Fund 2 Benchmark* Difference 3 months years years (1.60) 5 years (0.94) Calendar Year to Date Since inception (07/06) (0.07) 2 Performance figures are net of ongoing fees and expenses. * The benchmark changed from UBS Global Real Estate Investors Net Return Index (AUD hedged) to FTSE EPRA/NAREIT Developed Rental Net Return Index (AUD Hedged) effective 2-Mar-2015 open of business. Performance can be volatile and future returns can vary from past returns. The benchmark does not incur these costs. The performance figures quoted are historical, calculated using end of month redemption prices and do not allow for the effects of income tax or inflation. The calculations also assume that all income distributions have been reinvested. Performance has been prepared in accordance with 2016 GIPS standards UBS Asset Management 2

3 Stock Contributors & Detractors (%) Company name Return Contribution Over / underweight Ventas (6.35) 0.20 UW Klepierre OW GGP OW Public Storage (1.09) 0.13 UW Digital Realty Trust (2.66) 0.13 UW Total of top 5 Contributors 0.80 Prologis 2.66 (0.10) OW Macerich (0.11) UW Vereit (4.06) (0.12) OW Westfield (0.17) UW Vonovia (0.21) UW Total of top 5 Detractors (0.71) Note: Position at quarter-end, which may be different to the position during the quarter. Portfolio Positioning Active Positions by Stock (%) Overweights Underweights Equinix 2.24 Public Storage (2.45) Alexandria Real Estate 1.98 Digital Realty Trust (1.85) Link REIT 1.76 Ventas (1.69) Prologis 1.73 Boston Properties (1.59) Regency Centers 1.63 Vonovia (1.41) Note: Position at quarter-end, which may be different to the position during the quarter. Weights by Sector (%) Portfolio Retail: Enclosed Malls Retail: Community Shopping Centers Office Buildings Residential Industrial Properties Diversified Property Holdings 9.73 Healthcare Facilities 7.96 Residential: Hotels 5.60 Net Leased Properties 4.99 Self Storage Property 4.80 Technology Real Estate 3.27 Weights by Country (%) Portfolio Benchmark Canada United States Australia Hong Kong Japan New Zealand Singapore Continental Europe United Kingdom Top 10 Stocks (%) Portfolio Portfolio Simon Property 4.89 GGP 2.71 Prologis 4.43 Regency Centers 2.44 Link REIT 3.39 Extra Space Storage 2.32 AvalonBay Communities 3.16 Equinix 2.24 Alexandria Real Estate Equities 2.96 Klepierre UBS Asset Management

4 Market Review Real estate stocks finished the year with a strong 4Q and a mid-single digit total return for the year. While surging equity markets globally got all the attention, real estate stocks had a respectable year. Performance was underpinned by improving fundamentals, broad economic recovery, a strong private bid for real estate as an asset class, and attractive valuations versus the private market. Property companies in Europe and Asia faired best, as economic growth in those regions improved during the year off low expectations, while the U.S. REIT market paused following several years of outperformance. European property companies surged on improved confidence that economic conditions and real estate fundamentals are improving. Asia, ex-japan returns were also good, as Hong Kong and Singapore property companies moved sharply higher beginning early in the year following a weak 4Q16 as it became clearer that these markets were at a positive inflection point. U.S. REITs underperformed a global strategy for the first time in four years, likely the result of short-term negative sentiment from higher policy rates in the U.S. and net outflows from mutual funds in both the U.S. and Japan. UBS Asset Management 4

5 Outlook & Strategy Improving economic growth and modestly increasing inflation will benefit real estate stocks which we believe will generate +10% total return in The economic outlook is improving and this will have a positive impact on commercial real estate and listed real estate companies. Global economic growth is improving in a more synchronized manner than previously expected which is reflected in generally robust property fundamentals. Economic growth is gaining momentum in an economic expansion which continues to have legs at this point of an extended cycle. Monetary policy will tighten in the U.S. but remain relatively more accommodative elsewhere. Total return among property companies will be generated by 6% earnings growth and 4% dividend yield with stable multiples. We do not believe that multiples will contract, an out-of-consensus view, given attractive valuations, a strong M&A bid for listed real estate companies, a year of underperformance versus equities and an earnings multiple (funds from operation) which is now in-line-to-lower than that of the S&P 500. With real estate companies trading at an approximate 7% discount to our estimate of inherent real estate value (or NAV), and an implied capitalization rate approaching 6% globally, we believe real estate stocks remain attractively priced relative to private real estate and competing asset classes. Tax reform in the U.S. will be good for the U.S. economy. The new tax law will lower income tax rates for both individuals and companies in the U.S., which should stimulate both corporate and consumer spending and therefore boost economic growth. We believe the consumer will feel stronger as the result of higher disposable income, increased confidence in the economy, and a positive wealth effect from a higher stock market. Corporations will benefit from a materially lower corporate tax rate at 21% versus 35% previously, the ability to repatriate foreign cash at a lower tax rate and increased confidence from more visibility to the tax and regulatory environment. Demand for all users of commercial real estate will benefit from increased confidence and spending potential among both corporations and individuals. Real estate company earnings growth will again exceed 6%. Earnings growth will be generated by a combination of internal growth which is derived from improving rate and occupancy among the existing tenant base, and the ability to mark to market tenants with leases expiring in a given year, as well as external growth from accretive acquisition activity and the associated prudent recycling of capital. New supply is generally in check globally and the cost of capital will remain attractively priced with a lower yield curve than previous cycles despite upward pressure on short-term interest rates. Real estate dividend yields remain attractive and will grow again in Current income generated by listed property s dividend yield remains a defining investment characteristic of the sector. Listed property companies dividend yield currently averages nearly 4% globally and is growing at a very healthy clip. We project average dividend growth to exceed earnings growth in 2018, driven by a combination of improving company cash flows as well as an expansion of dividend payout policies which remain conservative. Increasing dividends are emblematic of healthy companies in improving markets. Tax reform will be good for U.S. REIT shareholders as the top marginal tax rate on REIT dividends will reduce from 39.6% to 29.6%. REITs distribute at least 90% of their income as dividends and do not typically pay corporate taxes. Rather, it is their shareholders who pay income tax on those dividends, at ordinary income tax rates. With the new tax law, REIT dividends tax rates will now decrease as a result of the pass-through nature of rental income, which now enables a deduction of up to 20% of rental income and therefore a reduction in the tax rate on dividends generated by Real Estate Investment Trusts. In other words, the top marginal tax rate on REIT dividends will decrease from 39.6% to 29.6% (which is 80% of the new highest marginal individual tax rate of 37%). This will improve the relative attractiveness of U.S. REITs as an asset class on an after-tax basis. As investors continue to seek income via dividend yield, and seek tax efficient income derived from ownership of real estate, demand for REIT shares will likely increase. In concert with our Sector Ranking Analysis, we are positive on property types and markets with above average growth and valuations that are attractive relative to this growth. We favor class A mall companies, technology, and select residential companies in the U.S. We also are positive on hotel companies, particularly U.S. c-corps which stand to benefit from tax reform which lowers the corporate tax rates for these companies. Within residential, we like manufactured housing, single family home-for-rent companies and select coastal apartment REITs. We also favor U.K. industrial and niche sectors such as student housing and Continental European property companies in firming markets, including those in the German residential sector, Spanish office and lodging sectors. European property fundamentals continue to improve consistent with economic releases which show steady and visible improvement in the eurozone. In Asia-Pacific, we prefer the Hong Kong retail sector as retail sales growth continues to recover, as well as industrial in both Japan and Singapore which continues to benefit from the secular growth in ecommerce. In Australia, while we remain cautious on the retail sector given headwinds from the growth in 5 UBS Asset Management

6 Outlook & Strategy (continued) online sales, we have become more positive following significant underperformance during We are cautious and selective in markets and property types with headwinds to earnings growth, either for secular or cyclical reasons. We remain cautious on the more bond- like sectors that offer modest growth and trade less attractively relative to our estimate of underlying private market real estate value. This includes the net lease, healthcare and suburban office sectors in the U.S., as well as the Canadian companies and the REITs in Singapore. Asian REITs generally have low organic growth and external growth which is dependent on a constant need for new equity to fund the acquisitions. UBS Asset Management 6

7

8 UBS Asset Management (Australia) Ltd Chifley Tower Level 16 2 Chifley Square Sydney NSW 2000 Tel Fax UBS Asset Management (Australia) Ltd (ABN ) (AFS Licence No ) is a subsidiary of UBS Group AG. This material provides general information only and has been prepared by UBS Asset Management (Australia) Ltd without taking into account your objectives, financial situation or needs. No representation or warranty, either express or implied is provided in relation to the accuracy, completeness, or reliability of the information contained herein. The information in relation to model portfolios including performance figures may not reflect your actual portfolio as the implementation of recommended model trades and holdings is beyond the responsibility of UBS and may differ due to timing differences or other considerations by others. This material does not constitute an offer or recommendation to buy or sell any securities or financial products, or to conclude any legal act of any kind whatsoever. Any opinions or forecasts expressed in this material are subject to change without notice and may differ or be contrary to opinions or forecasts expressed by other business areas or divisions of UBS Group AG or its affiliates ("UBS") as a result of using different assumptions and criteria. UBS is under no obligation to update or keep current the information contained herein. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS. Neither UBS Group AG nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material. Your investment does not represent deposits or other liabilities of UBS, and is subject to investment risk, including loss of capital invested. UBS Group AG The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.