Reitway Global Property Portfolio (SLT0054AU) Report & Performance

July was one of the better months of the year for the GPR 250 REIT World Index (USD). It produced a net total return of 3.24% and broke through its ~1,310 resistance line. The index continued to sit on this level for the succeeding 21 days after breaking through.

For now, it only seems to be enjoying the view, yet to have found the moxie to go higher. Breaking it down to a sector level, self-storage performed the worst among REIT peers—producing a return of -2.87%, while office was the best performing sector, delivering 9.28%.

Of the continents in the GPR 250 World Index, Europe performed the best, producing 9.7%. Asia was the worst performing continent, producing 1.8%. The chief driver of European outperformance was German residential.

Being heavily levered, uncrowded, and high beta, the sector got a potent shot of adrenaline from some ECB members hinting at an interest rate pause. Other developments, such as hedge fund de-grossing before summer trips, eventually translating into a short squeeze, is also believed to have played a part.

Earnings season went into full swing with about half of the US names reporting in July. On a sector basis, the most negative commentary came from industrial, with occupancies and market rent growth easing faster than expected in the world’s fourth largest industrial market: Southern California.

During June equity markets threw a party as the Nikkei 225 boasted the highest returns at +7.5%, the S&P 500 grew +6.5%, the Euro Stoxx 50 grew +4.3% and the Hang Seng grew +3.7% with all returns in local currencies.

Strength for the month was driven by a range of factors including the Fed pausing hikes at the latest meeting, rally in Japanese tech stocks and lower headline inflation in Europe. Fortunately, real estate cracked an invite but was not quite the life of the party as the GPR 250 REIT World Index (USD) delivered on the lower end of the spectrum at +3.3%.

In the GPR 250 REIT World Index, the outperforming sector for the month were regional malls as they contributed +7.7% in gains with specialty (+6.8%) and healthcare (+6.4%) receiving silver and bronze medals. Lodging and Resorts (-3.2%) continue to disappoint and the investor-favoured, industrial sector had a month to forget, returning -1.5% as a result of a broad-based decline across the US, Europe and Asia.

France had their month in the sun as the top performing geography with a +8.2% return. Mall giants Unibail-Rodamco-Westfield (URW) and Klepierre (LI) delivered +15.1% and +9.8% respectively after a few sell-side analysts upgraded their recommendations on URW during June.

URW walked away from their Westfield San Francisco Centre, handing the shopping centre over to lenders. The mall had been struggling to recover as foot traffic, retail sales and occupancies remained at ~43% below their pre-pandemic levels while the rest of the US portfolio had seen strong recoveries across these metrics in 2022 and into 2023. Although this appears to add to the CRE concerns, San Francisco in particular has struggled to bring back tourists as well as workers since the pandemic.

May started off with JP Morgan making a significant move to acquire First Republic bank valued at $10.6 billion, with the aim to alleviate concerns surrounding the stability of the banking system. With the collapse of two other US lenders in recent months, the demise of First Republic made it the second largest banking failure in US history.

During the month, the German economy slipped into a recession as a result of high inflation impacting household spending. GDP shrank by -0.3% in the first quarter, following a -0.5% decline in the previous quarter. Germany’s heavy dependency on Russia for energy supply was cited as a contributing factor along with household consumption which saw a significant decline of -1.2% quarter on quarter. Government spending also decreased by -4.9%.

Despite these negative figures, there were positive signs in investment, with machinery and equipment investment increasing by +3.2% and construction investment rising by +3.9%. While a recovery is expected in the second quarter, factors such as inflation, weak consumer purchasing power, and a potential slowdown in the U.S. pose challenges to the German economy’s path to recovery.

Across the Atlantic, the U.S. House of Representatives reached an agreement to suspend the $31.4 trillion debt ceiling, avoiding a potential default. The bill, a compromise between President Joe Biden and House Speaker Kevin McCarthy, garnered support from both Democrats and Republicans, despite facing opposition from hard-line conservatives. The agreement includes provisions that generated some opposition from progressive Democrats, such as new work requirements for certain federal anti-poverty programs. While the legislation is expected to result in $1.5 trillion in savings over a decade, it falls short of the saving targets proposed by Republicans and the deficit reduction goals outlined in Biden’s budget. Nonetheless, this agreement is seen as a positive development for the American people and the overall economy.

Economic data released by China indicates that the country’s performance is faltering. China’s April industrial output grew by 5.6% year-on-year, which was below expectations of a 10.9% increase. Similarly, retail sales grew by 18.4%, falling short of the projected 21.0% growth. The figures reflect a loss of momentum in the economy at the beginning of the second quarter, highlighting concerns about both the domestic and export engines of growth. Furthermore, property investment continued to decline, and other indicators such as shrinking imports, factory gate deflation, and weak bank loans further underscored the weak domestic demand.

The GPR 250 REIT Index declined by -4.31% in US dollar terms, erasing the prior months gain. All continents finished in the red, with losses ranging from -2% in Asia to -8.5% for Europe.

Among the geographical regions, Mexico showcased remarkable growth, generating an impressive return of +6.68%. Japan came in second delivering -1.95%. South Africa continue to encounter substantial difficulties as loadshedding and rate hikes persisted during May, experiencing the lowest return of -16.98%. Similarly, Sweden recorded a return of -15.10%.

Data centre REITs emerged as the top-performing sector, delivering a notable return of +3.23%, followed by hotel & resort REITs which gained +0.08%. Conversely, other specialized REITs (companies owing theatres, entertainment themed retail, casinos, restaurants), posted the lowest return of -7.33%, while retail REITs struggled as well, with a return of -5.99%.

Cash and Short-Term Liquidity Weighting: ↓ The allocation to highly liquid assets (cash, commercial paper and government bonds) decreased from 10.91% to 7.12%. This largely reflected increased allocations to bank T1, bank T2 and RMBS and lower allocations to corporate bonds and ABS.

Corporate & Subordinated Debt Allocation: ↓ Weighting to corporate bonds and subordinated debt (corporate hybrids and bank T2) decreased from 38.62% to 37.35%. After a relatively quiet start to the month, global credit spreads sold-off sharply toward mid-March, as concerns over a potential “banking crisis” riled financial markets. The forced merger between Credit Suisse and UBS saw the write-down of around US$16 billion worth of CS AT1’s but resulted in a very handsome capital gain to our high conviction CS senior debt position. Note: we did not have exposure to CS AT1’s. Unsurprisingly, bank capital securities (i.e., T2 and T1) underperformed during this period, which provided us an opportunity to pivot back into global assets – this was largely expressed through adding to USD T2/T1’s issued by strong Australian financial institutions while reducing allocations to AUD corporate bonds. While the outlook remains uncertain, the markets consider the impacts of the March “banking crisis” to be largely contained, which has led to a modest recovery in global credit spreads at month-end. New issuance activity was relatively quiet over the month as volatility remained high.

Interest Rate Duration Position: ↓ IRD positioning decreased from 0.58 to 0.38 years. Financial stability concerns were the major drivers to volatility over the month – the collapse of Silicon Valley bank in the United States and the forced merger between Credit Suisse and UBS being the main culprits. Concerns around contagion, in the US, were quickly thwarted by guaranteeing the noninsured deposits of SVB, however, global confidence suffered in the aftermath. As a result, the volatility of global government bonds was unsurprisingly high for the month of March – with absolute levels ending the month sharply lower than where they began. Most notably, market’s view on AUS terminal cash rate decreased from 4.2% to 3.5%, with the expectation of a rate cut by the end of 2023. In line with market movements, portfolio interest rate duration was decreased.

The month of February turned out to be a bear clamp on the market’s ankle, putting a drag on January’s momentum. The GPR 250 REIT World Index (USD) produced a net total return of -4.2%, pulling back from its six-month peak of ~1 415 to flirt with key resistance level at 1 300. Whether the market will respect this resistance remains to be seen. The hotel/resort sector performed the worst among REIT peers—producing a return of -6.6%, while diversified was the best performing sector, delivering -1.1%.

US economic data for the month is what snapped the back of the bull starting with a humdinger beat by non-farm payrolls of 517k versus the 193k that was expected. The reading was followed by a slew of upsetting core inflation data triangulating between core CPI, core PPI, and core PCE—two of which beat expectations by a significant margin: core PCE m/m 0.6% vs 0.4%; core PPI m/m 0.5% vs 0.3%; core CPI m/m 0.4% vs 0.4%, stoking further rate hike fears and pushing the market’s expectations for the terminal rate out to 5.4% from the 4.9% where it started the month. Some committee members admitted that if the mentioned data had been released before the rate hike on February 1st they would likely have voted for another 0.5% hike instead of the 0.25% the committee had ultimately voted on. The 0.25% hike put the fed funds rate at 4.75%.

In other central bank news both the BOE and ECB hiked by another 0.5% to reach policy rates of 4% and 3% respectively with the most hawkish rhetoric of the big three (ECB, BOE, and the Fed) continuing to come from the ECB while the BOE hinted at tilting dovish based on wording changes to their statement, the minutes, and comments on mispriced longer-term rate expectations in the market.

In earnings season, US single-family REIT expenses took a bit of a bite in Q4; management expects expense pressures to continue into 2023. We are acutely aware of this force and believe single-family to be a robust space for an economic slowdown with conservative guidance from management leaving room for beats on both the revenue and expense side. On the US Multifamily side, expense growth is guided at a lower range than single-family. Top line growth, however, is expected to be lower as well. North of the US border, one of our largest active weights, Boardwalk REIT, posted strong results for Q4 and reported accelerating growth in 2023 of 10.5% same store NOI growth, well above its US peers. Public Storage, one of our benchmark’s largest holdings, beat Q4 earnings expectations by 5.2% and fell slightly short (1.6%) of market expectations for ‘23.

In Europe, February was rather slow on news other than the traditional full year earnings reports, as transaction market volume is still close to non-existent. The most important event was Castellum that announced an emergency rights issue (~21% of market cap) to shore up their balance sheet. The issue will lower their loan to value (LTV) to 50% which means they need significant disposals to reduce leverage. The fund does not hold shares in Castellum.

The month of January certainly delivered in terms of market returns. The GPR 250 REIT World Index (USD) produced a net total return of 9.2%, breaking through its 1300 resistance level and ending the month at a high of 1377.35. In the REIT universe, the hotel/resort sector performed the best among peers—producing a return of 14.5%, while diversified was the worst performing sector, delivering 4%.

US economic data for the month of January brought great market optimism, bolstering hopes of a soft landing. Non-farm payrolls, although still elevated at 223k, posted its lowest reading since January 2022. Unemployment claims, however, continued to tick lower with its last reading coming in at 186k. Average hourly earnings (0.3% m/m) missed estimates by 0.1% while unemployment dropped from 3.7% to 3.5%. The divergence in unemployment and wage data (heightening the probability of a soft landing) cranked up the speaker and the market jamboree kicked off in full force.

Momentum was maintained by both core CPI and core PCE coming in at 0.3% m/m, the third successive time both readings landed in the 0.2%-0.3% range, down from the 0.5%-0.7% range. The month ended strong with another closely watched indicator—the employment cost index q/q, a measure of the change in total employee compensation—coming in 0.1% below expectations at 1%. The Willshire US REIT index, Nasdaq Composite, and S&P 500 rallied 2.2%, 1.67%, and 1.46% on the day of the release.

Layoffs accelerated in the month of January as corporate chiefs started cleaning house. Global tech layoffs were more than 77,916 by as many as 241 firms, with tech giants Alphabet, Microsoft, and Amazon leading the pack. Laid off tech employees were quickly absorbed back into the workforce as demand for the profession remains high. Financial sector layoff activity continued in January, with Goldman Sachs announcing it will lay off approximately 6% of its workforce—one of the company’s biggest round of layoffs since the global financial crisis.