APN & Real estate securities investing in Australia - Michael Doble CEO Real Estate Securities Pete Morrissey Fund Manager March 2014
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APN & Real estate securities investing in Australia Michael Doble CEO Real Estate Securities Pete Morrissey Fund Manager March 2014
Outline
APN – about the manager
Real estate investment trusts (REITs) features
Why AREITs?
Reporting season round up
APN AREIT Fund – features & return profile
Currency factor
Conclusion & Market outlook
2
APN Property Group
is a specialist Asia Pacific
real estate investment manager
3
APN investment philosophy
Specialist real estate investment manager
Income focus
Active investment management - index unaware
Capital growth aligned to CPI increases
Tax effective income
Fundamentals of real estate core focus
Quality AREITs purchased at the best price
Regular monthly income
Proven investment philosophy well suited to investors seeking a high level of
income with inflation proofing
4
Asia Pacific real estate securities specialists
Australian platform with an experienced Established Asian platform with vast local
Chief Investment
investment team and highly disciplined networks, expert real estate skills, proven
Officer
investment approach established in 1998 Diversification
Howard BrenchleyCapital growth
platforms and research capability
Melbourne office Singapore office
CEO Real Estate CEO Real Estate
Securities (Australia) Securities (Asia)
Liquidity Tax effective
Michael Doble Stephen Finch
Fund Analyst Fund Manager Fund Manager
REITs Fund Manager Fund Analyst Operations & Compliance
Steven Chai Damian Diamantopoulos Peter Morrissey Manish Bhargava Anyu Tan Francis Tan
(Melbourne) (Melbourne) (Melbourne) (Singapore) (Singapore) (Singapore)
Comparatively
Expertise low costs
Supported by a disciplined, scalable and well resourced operations platform
Low entry
High yields
IT Client services Compliance threshold
Finance Marketing Distribution
5
Australian Real Estate Investment Trusts (AREITs)
6
Fundamental features of REITs
Exposure to a wide ranging portfolio of underlying Growth is generally consistent with
Diversification Capital growth
(generally) high quality commercial property CPI over the medium to long term
Ability to invest (or divest)
at anytime – can trade Liquidity Tax effective Part of the income received
REITs just like shares may be tax advantaged
REITs
Managed by teams of specialist Comparatively No direct rates, levies,
Expertise maintenance, stamp
property and investment low costs
experts duties etc
Relative to residential returns/other Small capital investment required (compared
investments REITs generally pay out a high Low entry to large capital commitment required when
High yields
percentage of earnings as distributions due to threshold directly purchasing a commercial property
their trust and / or legal structure investment).
Risks, such as investment risk, liquidity risk and re-financing risk, apply to an investment in REITs.
7
Why Australian REITs?
Transparent and secure property markets Australia
Fundamentals High occupancy and rental growth
Robust banking system
Diversification Capital growth
Underlying inflation
under control
Strong GDP growth and economy still expanding
GDP growth
Forecast1 2014 GDP growth: 2.25% - 3.25% Steady interest rates
Liquidity Strong fiscal position
Tax effective (relatively)
7.5%+2 forecast 2014 dividend yield for APN AREIT Fund
High yields Healthy spread to risk free rate of 330 bps Improving business and
REITs consumer sentiment
Low unemployment rate
Valuations are attractive, discount to NAV 6.0%³
Capital growth Favourable credit spreads make acquisitions accretiveComparatively
Expertise low costs Economy relatively
resilient compared to
Strong balance sheets the protracted
Defensive Conservatively geared up to ~30% slowdowns in the US
Diversified and intensively managed borrowings and much of Europe
Low entry
High yields
threshold
Post GFC gearing, earnings and “management” risks have
Structure been substantially eliminated 1. RBA
2. APN models
3. ABS Dec 13
8
Key indicators for value
Fair value estimates vs AREIT prices (premium/discount)
6.6% discount
to NAV
Source: UBS estimates;
31 January 2014
AREIT yield at premium to 10yr bonds
Yield remains
attractive with a
healthy spread
~1.5%
Source: IRESS, UBS estimates;
31 January 2014
9
Key indicators for value
Property Trust Sector Premium/ Discount to NTA
11.7%
premium
Source: Bloomberg, J.P.Morgan
31 January 2014
10AREITs have returned to the traditional model
AREIT 1 month rolling standard deviation
AREITs are
lower risk
again
Source: APN FM
Returned
FY13 - corporate earnings versus rental
AREIT sector gearing to long
term
average
Focus on ≈30%
passive
income
streams
Source: Morgan Stanley; August 2013 Source: J.P.Morgan 31 December 2013
11Australian commercial property sector
Retail Office Industrial Other
Retail sales slowly recovering Business confidence and GDP supportive Healthcare
Households still repairing conditions choppy (NAB AUD should aid Australian Defensive sector, high demand
balance sheets Survey) manufacturers’ and exporters’ for services and long weighted
Slow white collar employment competitiveness lease terms underscore excellent
Savings ratios still elevated fundamentals
growth (Syd/Melb/Perth) E-retailing continues to
Vacancy levels stabilised in
some sectors Low unemployment 6.0%¹ support demand for logistics
Retirement
accommodation
Consumer confidence Improving transaction activity Strong demographics support
Cap rates and land values long term
stabilising albeit choppy Rent growth slowing
have troughed; positive rental
Slowing rates of rent growth Elevated incentives Stronger housing market a
growth
some negative reversions positive
National CBD vacancy at Prime asset valuations to Sector still maturing
Stable non-discretionary 11.8%² - Q4 2013 increase due to increased
spending demand and limited supply
Lower barriers to entry (GFC Residential
Highest barriers to entry capped supply this cycle)
Price appreciation
Cost of debt low
Structural undersupply
Hotel (Accommodation)
Not structured like traditional
property
Landlords exposed to business
risk
Higher risk sector
1. Source: ABS January 2014
2. Source: JLL December 2013
12Why Australian REITs
Upside Downside
Diversification Capital growth
indicators risks
Steady domestic macro US and Euro region fragility
environment
Liquidity
China – pullback
Tax effective
Steady capital values and Geopolitical tensions (Middle
property fundamentals East/ Korean Peninsula)
Capital values stagnate
Lower debt margins and
steady base rates mean
REITs Rising white collar
debt cost reversion for unemployment
some AREITs (albeit Choppy consumer
Comparatively
and
Expertise
diminishing) low costs
business sentiment
Accretive acquisitions Excess equity from capital
possible raising
Strong demand for assets
from offshore investors to Low entry
High yields
push up values threshold
13Reporting season roundup
Overall:
Earnings tailwinds from lower debt costs (Ave debt levels steady).
NTA was up 2.5% on the half year and 3.7% over the past year.
Net Operating Income (NOI) growth was up (avg) 2.3% over the six months
EPS / DPS growth was 3.3% & 5.7% respectively (DPS driven by higher payout to 83%)
Occupancy rates reduced marginally
Retail:
Releasing spreads remain negative, non-discretionary remain positive.
Strong Q4 2013 and January 2014 – lead to an optimistic outlook for 2014.
Office:
Soft demand, higher vacancy rates and incentives.
Brisbane and Perth weak, Melbourne and Sydney retain stronger outlooks.
NOI growth remains robust at 2.7% - the strongest in the AREIT sector.
Positive tailwinds: residential conversions and modest new supply levels.
Industrial:
NOI growth around 1.8% however vacancy levels increased across AREIT industrial
portfolios to around 4.9%.
Stronger GDP is supportive.
14APN AREIT Fund key features
15APN AREIT Fund: Key features
Strategy Objective Differentiation
Strategy Objective Benefits
Invests in Australian Gross income that Monthly distributions
listed property securities equates to approximately
Tax advantaged
and cash/fixed interest 110% of the average yield
income
of the S&P/ASX 200
APN continually review Property Trusts Dividend Lower volatility
and, if appropriate, Yield series
re-weight the Australian Index unaware
Tax advantaged income
Securities Fund’s Focus on Australian
investments within its Capital growth at least
rental income
asset allocation matching CPI over
parameters with the investment horizon 5-7
objective of optimising years
the AREIT Fund’s Minimise volatility
distributable income
The Funds aim to provide a consistent, relatively high level of income with some capital
growth sourced from a variety of AREITs.
16APN AREIT Fund
APN AREIT Fund Range Target Current¹
AREITs 90-100% 98% 96.8%
Cash²/fixed interest 0-10% 2% 3.2%
1. As at 28 February 2014
2. Cash includes accrued income and accrued expenses
APN AREIT Fund
Income objective 110% of S&P / ASX 200 Dividend series
Capital growth objective CPI
Risk philosophy Low risk
Stock exposure – corporate earnings3 20-30%
Stock exposure – international assets Up to 100%
Portfolio exposure – corporate earnings Max 15% of total income from corporate earnings
Portfolio exposure – international assets Max 50% of S&P / ASX 300 Property Index weight
Look through gearing estimates Circa 30%
MER4 0.85%
Liquidity Sell < 20 trading days
3. Denotes upper limit applies if substantially annuity style earnings, can invest up to 50% of index weight irrespective of corporation earnings
4. Where no adviser remuneration is paid
17NZ REITs vs. Australia & the APN AREIT Fund
New Zealand Real Estate Price NZ$m Index %
Trusts 13/03/14 Cap NZ REITs vs. AREITs
ARG ARGOSY PROP $0.91 $716 13.7%
AUG AUGUSTA CAPITAL $0.78 $63 1.0% High concentration
Commercial risk
CDI CDL INVESTMENTS $0.55 $151 1.1% property
Small number sectors:
of stocks
DNZ DNZ PROPERTY $1.53 $452 8.6%
GMT GOODMAN PROP $0.97 $1,172 18.4%
KIP KIWI INCOME PT $1.14 $1,157 22.1% Very low liquidity
NPT NPT LTD $0.62 $100 1.9%
PFI PROPERTY FOR IND $1.28 $527 10.1% Mkt Cap NZ$6b vs. NZ$93b
PCT PRECINCT PROPs $1.02 $1,076 16.7%
VHP VITAL HEALTHCARE $1.29 $437 6.5%
10 Total/Average $5,850 100%
Comparison (NZD) NZ^ Aust* APN~ A$/NZ$ Cross $0.95
Yield
Market Cap/Size ($m) #
5.9%
$5,845
5.7%
$92,586
7.7%
$536
^ = NZX Property Index
* = S&P/ASX 200 AREIT Index
NZ REITs vs. APN AREIT Fund
No of Constituents
Top 3
10
57%
17
47%
29
3.0%
~ = APN AREIT Fund
# = APN as at Feb 14
Less diversification
Top 5
6mnth Avg T/O (Shares)
79%
802,530
63%
4,927,430
11.8%
n/a
+ = 19 Jan 2009
Source: Bloomberg/APN
Lower yield
Daily T/O Total Value ($m)
Returns 1 Year
$6
2.3%
$321
3.9%
n/a
5.7%
Less liquid market
3 Years
Since Inception
12.6%
11.4%
11.5%
11.2%
13.3%
15.8%
Competitive risk-adjusted
Risk Since Inception+ 9.2% 15.7% 12.8% returns
18APN AREIT Fund risk & return profile; AUD:NZD factor
19APN AREIT Fund risk return analysis
APN AREIT Fund vs Benchmark over 5 yrs to 31 January 2014
Performance (%)
APN AREIT Fund
S&P/ASX 300 Property
Trusts Accumulation Index
Australian listed property
peer group*
*Funds with more than 5 years’
performance. Returns are calculated by
Morningstar after fees are deducted.
Past performance in not an indicator of
future performance.
Source: Morningstar Direct 6 February
2014
Risk (%)
APN AREIT Fund consistently offers strong risk-adjusted returns underpinned by
considerably lower levels of volatility relative to the Index and peers
20APN AREIT Fund versus the market
Metric APN AREIT Fund Index¹
Current/running yield 7.7%² 5.7%³
Number of investments 29 (cover 30) 17
Offshore exposure 8.3% 15.7%
Domestic exposure 91.7% 84.3%
Corporation earnings exposure4 9.9% 18.4%
Look through gearing5 28.4% 29.0%
1 year standard deviation6 10.2% 11.7%
1. S&P/ASX 200 Property Trust Accumulation Index
2. Approx. current monthly distribution (annualised)
divided by the latest entry unit price (net of
management fees and expenses) as at 28 February 2014
Distributions may include a capital gains component
3. Approx. S&P/ASX 300 Property Trust Accumulation Index as at 28 February 2014
4. Earnings that are deemed non-passive i.e. development and funds management
5. Weighted average gearing as at 28 February 2014
6. Standard deviation calculation based on monthly returns
Source: UBS/APN/JPM
The APN AREIT Fund has a superior running yield and lower
risk factors compared to the Index
21APN AREIT Fund | performance history
As at 28 February 2014
Time period APN AREIT APN AREIT APN AREIT Index² Out/ (under
Fund Growth¹ Fund Income¹ Fund Total¹ performance)
1 month 3.1% 0.7% 3.8% 4.3% (0.5%)
3 months 1.4% 2.0% 3.4% 3.4% 0.0%
6 months 1.2% 4.0% 5.2% 4.2% 1.0%
1 year (2.1%) 7.8% 5.7% 3.9% 1.8%
3 years pa 4.2% 9.2% 13.3% 11.5% 1.8%pa
5 years pa 9.1% 10.0% 19.1% 16.1% 3.0%pa
Since inception³ pa 6.3% 9.5% 15.8% 11.2% 4.6%pa
1. Retail returns (net of all fees). Distributions may include a capital gains component
2. Approx. S&P/ASX 300 Property Trust Accumulation Index as at 28 February 2014
3. Fund inception 19 January 2009
The APN AREIT Fund has significantly outperformed the Index return
over the same period since inception
22APN AREIT Fund performance benchmark | yield
Investment objective: 110% of average yield of the S&P/ASX 200 Property Trusts Dividend Yield series
Date APN AREIT Fund Benchmark Yield² 110% of Benchmark Out / (under
Yield¹ Yield performance)
Year ending June 2013 8.3% 5.6% 6.1% 2.2%
Year ending June 2012 9.7% 6.6% 7.3% 2.4%
Year ending June 2011 9.1% 5.9% 6.5% 2.6%
Year ending June 2010 10.1% 6.4% 7.0% 3.1%
1. Average distributions before management fees and expenses.
Distributions may include a capital gains component
2. Source: AREIT 200 Average Dividend Yield
Income is the primary objective of the APN AREIT Fund
23Currency Implications for NZ Investors – NZD:AUD FX trends
NZD:AUD and Std Dev
$0.95
$0.90
$0.85
$0.80
$0.75
$0.70
Avg $0.83
$0.65
Sep-93
Sep-00
Sep-07
Nov-94
Nov-01
Nov-08
Mar-90
Mar-04
Mar-11
Mar-97
Jul-92
Jul-06
Jul-99
Jul-13
May-91
May-05
May-12
May-98
Jan-89
Jan-03
Jan-10
Jan-96
NZ$ appreciation vs. A$ has been extreme over past year, the magnitude of this movement only
being exceeded once since the NZ$ floated.
Average rate between 1989 and 2014 is $0.83 – $0.94 currently, 14% lower.
History shows reversion back to the average level will occur at some time.
Using a Standard Deviation of 1.5 indicates that the NZD has traded at or above A$0.92 less
than 7% of the time since the NZ$ floated - highlighting the irregularity of this occurrence.
Strength of NZ$ supports Australian investment thesis.
24Conclusion
25APN AREIT Fund | Benefits at portfolio level
Income Performance Growth Diversification
Relatively high Proven track Inflation proofing: Low correlation with
income record of market capital growth equities / equity fund2
outperformance generally aligned to Low correlation with
Monthly distributions
CPI over the longer global REITs3
Low standard
Foreign Inv Fund can term
deviation Active with high
provide tax benefits
positively Strong GDP can be tracking error
for NZ investors
contributes to a positive force for > provides
contributing to overall
overall portfolio CPI growth diversification to
tax effectiveness
volatility1 passive / index
positions4
Notes
1. Lower volatility than S&P/ASX300 AREIT TR over all periods
2. AREIT Fund focus on passive rental earnings (50% less corporate earnings than S&P/ASX300 AREIT TR index)
providing superior diversification to equities / equity funds
3. 91.7% of underlying assets are Australian commercial property (incl 2.2% NZ) low correlation with Global REIT Funds
4. AREIT Fund invests in underlying REITs selected based on property fundamentals aligned to APN philosophy / style
without reference to the S&P/ASX300 AREIT TR index composition As at 31 December 2013
26Conclusion and AREIT sector outlook
Global uncertainties set to continue into CY 2014
Australian property markets in equilibrium (landlord and tenant perspective).
AREIT valuation metrics:
- Yield spread to bonds is attractive
- Trading at a modest discount to NAV
- ~ 2.6% 5 year DPU growth anticipated
- Lower debt costs remain a tailwind
The APN style to continue to benefit from the overall investment climate
We remain optimistic and expect the AREIT sector to deliver 9-11% total return for
CY14
27APN contact details
Michael Doble Pete Morrissey Peter Mill
CEO Real Estate Securities Fund Manager Real Estate Securities Head of Channel Development
+61409023702 T: +613 8656 1040 T: +613 8656 1071
+61386561030 M: +614 1987 2833 M: +614 0920 9036
mdoble@apngroup.com.au pmorrissey@apngroup.com.au pmill@apngroup.com.au
Adviser Services Hotline
1300 027 636
APN Property Group
Level 30,101 Collins Street,
Melbourne, Vic 3000
www.apngroup.com.au
28New Zealand contact details for APN Funds
Toll free NZ 0508 410 815
Clayton Coplestone David Batty
Director Key Account Executive
T +6421 410 815 T +6421 288 0303
clayton@heathcoteinvestment.com david@heathcoteinvestment.com
29Appendix
30Current running yield above 7.7%pa1
Outperforming the AREIT Index2
by 4.6%pa since inception A leading Australian
property securities fund
Proven investment philosophy
established since 1998
Income focussed
Monthly distributions
Actively managed portfolio Fund size
Lower than market volatility $536.08m
As at 28 February 2014
100% liquid
1. As at 28 February. Current running yield is calculated by dividing the annualised distribution rate divided by the latest entry unit price. Distributions may include a capital gains component. 2.
S&P/ASX 300 Property Trusts Accumulation Index. APN AREIT Fund inception 19 January 2009. Returns are calculated after all fees and expenses are deducted. Assumes distributions are
reinvested. Investors' tax rates are not taken into account when calculating returns.
General risks apply. APN Funds Management Limited is the responsible entity and issuer of the Fund. Before making an investment in the Fund you should consider important information about
risks, costs and fees in the PDS available at www.apngroup.com.au or by contacting APN on 1800 996 456. Past performance is not an indicator of future returns.
31Investment process overview and risk management
A detailed, methodical and insightful process that enforces a consistent approach to screen
Diversification
for risk and Capital
accurately measure growth reward
potential
Investment process Risk management
6. Detailed 1. Macro factors: 6. Portfolio 1. Macro factors:
Economic and property construction Markets, locations,
valuations on Liquidity
Property demand & Tax effective
majority of Aust economic influences
supply
and Asian REITs
Valuation:
Yield / Multiple 2. Overlay micro REITs Multi disciplined
5. Build a detailed CAPM local market
5. Trust analysis 2. Financial
Aust and Asian REIT knowledge: approach to risk
knowledge bank Beta Market outlooks management market risks
DCF (broker & APN) Leverage deep networks Comparatively
Expertise to assess local nuances
low costs
NAV / NTA
NOI Forecast
4. Screen 3. Assess all
investment factors that will 4. Manager 3. Asset assessments
managers impact risk and assessment
return
Low entry
High yields
threshold
32Disclaimer
This summary has been prepared by APN Funds Management Limited (APNFM) (ACN 080 674 479 ABN 60 080 674 479, AFSL No 237500) for general
information purposes and whilst every care has been taken in relation to its accuracy, no warranty is given or implied. APNFM is a wholly owned subsidiary of
APN Property Group Limited ACN 109 845 068. APNFM is the responsible entity and issuer of the APN Property Group products. The information in this
document is current only as at 11 March 2014 or as otherwise stated. This document is for information purposes only and only intended for the audience to who it
is presented. This document comprises general financial advice only. The information provided does not constitute investment advice and does not purport to
contain all relevant information necessary for making an investment decision. It is provided on the basis that the recipient will be responsible for making their own
assessment of their financial needs and will seek further advice about the investment as is considered appropriate. Returns shown are for retail investors, net of
fees and costs and are annualised for periods greater than one year. Returns and values may rise and fall from one period to another. Past performance is not an
indication of future performance.
This presentation may contain certain forward-looking statements regarding future events and the future financial performance of APN funds, including
statements regarding forecast earnings and distributions, net tangible asset backing, anticipated gearing and property market fundamentals. Actual outcomes
may differ materially from these forward-looking statements and no representation or warranty is given in relation to these including as to their completeness or
accuracy on the basis on which they were prepared. This presentation contains statements that are subject to risk factors associated with an investment in APN
funds and the industry in which APN operates.
General risks apply to an investment in APN funds and must be considered before making an investment. In deciding whether to invest or continue to hold an
investment in APN funds, a person should obtain a copy of the Product Disclosure Statement for the relevant fund and consider its content. We recommend that
a person obtain financial, legal and taxation advice before making any financial investment decision. A copy of the PDS is available from APN Funds
Management Limited, at Level 30, 101 Collins Street, Melbourne 3000 or by visiting www.apngroup.com.au.
No warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations (which may change without notice) or other
information contained in this document and, to the maximum extent permitted by law, APNFM disclaims all liability and responsibility for any direct or indirect loss
or damage which may be suffered by any recipient through relying on anything contained in or omitted from this document. This material shall not be reproduced
or used for any other purpose without the express permission of APNFM.
© APN Property Group Limited
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