NEDGROUP INVESTMENTS PROPERTY FUND. Quarter 2, 2018

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1 NEDGROUP INVESTMENTS PROPERTY FUND Quarter 2, 2018 For the period ended 30 June 2018

2 MARKET COMMENTARY The FTSE/JSE SA Listed Property (SAPY) index declined by 2.2% in the second quarter of Since the start of the year, the SAPY index has declined by 21.4%, mainly because of large price declines in Fortress B, Greenbay, NEPI Rockcastle and Resilient ( the Resilient group ). While the share prices of both Fortress B and Resilient gained more than 20% in the second quarter, year-to-date Fortress B is still down 62.2% and Resilient is down 57.1%. Following significant positive news for South Africa s listed property companies in the first quarter, including a 0.25% reduction in the repo rate and Moody s decision to keep South Africa s sovereign credit rating at the lowest level of investment grade, the second quarter was characterised by growing headwinds for property companies in South Africa. The rand depreciated by more than 13% against the US dollar in the second quarter as investor appetite for emerging markets waned in the face of an escalating trade war between the United States and China. The US Federal Reserve raised official interest rates by 25 basis points and signalled that a further two hikes were possible in 2018, despite the risks to growth poised by the US/China trade ware. As a result, South African bonds followed the rand and weakened substantially during the quarter. The yield on government s benchmark R186 bond rose more than 80 basis points to finish the quarter at 8.84%. Against this backdrop, most South African listed property companies delivered negative returns for shareholders in the second quarter (continuing with the trend since the beginning of the year). Most investors in the listed property sector have lost a fifth of their capital (-21%) since the end of December last year, while the Nedgroup Investments Property Fund in contrast is down 3% year to date. The steep losses experienced by the average investor in the sector have no doubt undermined confidence in South African listed property companies. However, the bulk of the losses incurred by the sector in 2018 were company-specific and do not reflect a systemic risk in the sector. Most of the companies continue to trade at significant discounts to net asset value and on yields well above the yields on longer-dated SA government bonds, offering significant value for long-term investors. PORTFOLIO COMMENTARY Performance to 30 June 2018 Nedgroup Investments Property Fund 1 ASISA category average SAPY 3 months -6.0% -2.1% -2.2% 12 months -5.1% -8.7% -9.9% During the second quarter of 2018, the fund underperformed the SAPY index as well as the average of the peer group. 1 Net return for the Nedgroup Investments Property Fund, A class. Source: Morningstar (monthly data series). Page 2

3 The recovery in the prices of Fortress B, Greenbay, NEPI Rockcastle and Resilient helped the SAPY index limit losses in the second quarter, while the mid- and small-capitalisation South African-focussed companies came under pressure along with South African-focussed companies in other industries. The fund continues to have no exposure to the Resilient group of companies as they remain under investigation by the FSCA and the JSE following allegations of share price manipulation which lead to the companies becoming grossly overvalued by the end of Among the mid-capitalisation companies, Arrowhead s share price declined by more than 14% in the second quarter despite a slightly more upbeat outlook statement from the company s management following increased letting activity which should see a meaningful reduction in the company s vacancy rate and lead to stronger distribution growth in the 2019 financial year. The fund continues to favour investments in South African-focussed companies trading at large discounts to net asset value. While some sceptics have questioned the validity of net asset values published by the companies themselves, anecdotal evidence in 2017 and 2018 suggests that the property valuations reflect current market values. Recent property sales by companies in the fund have been at values slightly above those reflected in the company s latest financial reports. Investing in a property company trading at a 20% or even 30% discount to net asset value provides a significant margin of safety for investors. Coupled with an initial income yield well in excess of consumer inflation, these companies are likely to produce high doubledigit returns for investors in the medium and long-term. The fund s distributions are forecast to grow by between 4% and 6% this year on the back of the weaker domestic economic backdrop and ongoing political risks across the globe. Despite the current slowdown in distribution growth, over the medium-term, distribution growth is forecast to exceed South African consumer inflation and maintain the fund s impressive track record since it was launched in July Based on a combination of FactSet, IRESS and Bridge Fund Managers forecasts, the weighted average forward yield of the portfolio is currently 12.3%. Based on the same forecasts, the weighted average forward yield on the FTSE/JSE SA Listed Property (SAPY) index is 8.5%, while the yield on government s R186 bond is 8.7%. As stated earlier, the fund continues to invest predominantly in small and mid-sized, domesticallyfocused listed property companies. These companies continue to trade at discounts to net asset value due to a lack of meaningful institutional support. This provides a significant opportunity for smaller investors or institutional investors that intentionally limit their absolute exposure to listed property (like Bridge Fund Managers). These property businesses also continue to offer investors attractive initial income yields well above the yields on long-dated government bonds, while at the same time offering growth in distributions that are forecast to exceed inflation over the medium and long-term. As a result, they allow the fund to meet its objectives of providing a high level of current income, consistent inflation-beating income growth and long-term inflation beating capital growth. Page 3

4 TOP 5 WINNERS AND LOSERS FOR Q2 2018: Winners Ave.weight Performance contribution Losers Ave.weight Performance Contribution Indluplace 7.6% 0.3% Arrowhead 9.8% -1.5% Octodec 9.8% 0.2% Accelerate 10.1% -0.9% Spear REIT 2.5% 0.2% Dipula 7.7% -0.8% Grit Real Estate 3.2% 0.1% Delta 10.2% -0.8% Vukile 0.3% 0.0% Rebosis 9.5% -0.6% 0.8% -4.6% DISTRIBUTION The fund s distribution in the second quarter was substantially larger than the distribution declared in the first quarter of 2018, as well as the second quarter in The principal reasons for this are as follows: 1) The first quarter distribution is historically the lowest distribution of the year. 2) No dividend was received from either Arrowhead Properties or Indluplace Properties in the first quarter of 2018 because both companies have moved from quarterly to semi-annual dividend payments. The fund received the first semi-annual dividend payments during the second quarter. 3) The fund disposed of its investment in Hospitality Property Fund which paid dividends in the first and third quarters and used the proceeds of that disposal to add to positions in Octodec and Indluplace, both of which pay their dividends in the second and fourth quarters. Based on IRESS, Bloomberg and FactSet consensus forecasts, the fund s distribution in the third quarter of this year is expected to be between 2.0c and 2.2c per unit. This forecast may change depending on price movements of the underlying securities in the portfolio as well as changes the manager may make to the portfolio between now and the end of the quarter. Page 4

5 WHO WE ARE Nedgroup Collective Investments (RF) Proprietary Limited, is the company that is authorised in terms of the Collective Investment Schemes Control Act to administer the Nedgroup Investments unit trust funds. It is a member of the Association of Savings & Investment South Africa (ASISA). OUR TRUSTEE The Standard Bank of South Africa Limited is the registered trustee. Contact details: Standard Bank, Po Box 54, Cape Town 8000, Trustee-compliance@standardbank.co.za, Tel PERFORMANCE Unit trusts are generally medium to long-term investments. The value of your investment may go down as well as up. Certain unit trust funds may be subject to currency fluctuations due to its international exposure. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. PRICING Funds are valued daily at 15:00. Instructions must reach us before 14:00 (12:00 for Nedgroup Money Market Fund) to ensure same day value. Prices are published daily on our website and in selected major newspapers. FEES Certain Nedgroup Investments unit trust funds apply a performance fee. For the Nedgroup Investments Flexible Income Fund and Nedgroup Investments Stable Fund, it is calculated daily as a percentage (the sharing rate) of total positive performance, with the high watermark principle applying. For the Nedgroup Investments Bravata World Wide Flexible Fund it is calculated monthly as a percentage (the sharing rate) of outperformance relative to the fund s benchmark, with the high watermark principle applying. All performance fees are capped per fund over a rolling 12-month period. A schedule of fees and charges and maximum commissions is available on request from Nedgroup Investments. DISCLAIMER Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Nedgroup Investments has the right to close unit trust funds to new investors in order to manage it more efficiently. For further additional information on the fund, including but not limited to, brochures, application forms and the annual report please contact Nedgroup Investments. NEDGROUP INVESTMENTS CONTACT DETAILS Tel: (RSA only) Tel: (Outside RSA) Fax: (RSA only) info@nedgroupinvestments.co.za For further information on the fund please visit: OUR OFFICES ARE LOCATED AT Nedbank Clocktower, Clocktower Precinct, V&A Waterfront, Cape Town, 8001 WRITE TO US PO Box 1510, Cape Town, 8000 Page 5