SG Hiscock Property (CRS0007AU) Report & Performance

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of:

• A Net Present Value (“NPV”) Discount;
• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”).

The S&P/ASX 200 AREIT Accumulation Index was relatively flat, down.0.1%, with a predominant number of AREITs trading on an exdistribution basis in late-June.

The AREITs underperformed both the Global REITs (up 2.8%) and the general market (via the S&P/ASX 300 Accumulation Index) which was up 1.7%. The information technology sector continues to benefit from the AI thematic permeating the globe, whilst the materials sector was the best performing sector in the ASX in June.

Both the ten-year bond yield and ten-year real bond yields jumped ~40 bps, to 4.02% and 1.58% respectively. This has resulted in the implied inflation expectations for the next 10 years remaining relatively stable at ~2.4% pa, around where we forecast longer-term inflation to be. Thus, the inverse correlation between the AREIT sector’s performance and real bond yield movements was broken once more in June, as the market (overall) looks through the interest rate rises.

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of: • A Net Present Value (“NPV”) Discount;

• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”).

The S&P/ASX 200 AREIT Accumulation Index fell 1.8%, as the markets increasingly started to factor in further interest rate rises/higher for longer, given the ongoing, robust inflation data.

Consumer discretionary and staples were the worst performing sectors on the ASX in May, given a slowing in retail sales, tradingdown/value-conscious shopper coming to the fore. Retail AREITs, especially those exposed to discretionary retail fell in sympathy (unfairly in our view) given the fact that these sales figures have come-off relatively high levels and their rents are not determined upon a retailer’s sales turnover.

The AREITs (again) outperformed both the Global REITs (down 3.8%) and the general market (via the S&P/ASX 300 Accumulation Index) which was down 2.5%, driven by the underperformance in consumer sectors and financials. Information Technology delivered ~12%, benefitting from the AI thematic permeating the globe.

The ten-year bond yield rose 27 bps, to 3.61%. The ten-year real bond yields only rose 20 bps, to 1.17%. This has resulted in the implied inflation expectations for the next 10 years rising to 2.44%, edging closer to what we forecast longer-term inflation to be. The correlation between the AREIT sector’s performance and real bond yield movements was therefore reestablished, given the enhanced risk of further interest rate rises.

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of:

• A Net Present Value (“NPV”) Discount;
• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”).

The S&P/ASX 200 AREIT Accumulation Index dropped 6.8%, as markets sought liquidity, as fears of a global banking crisis swept through economies. The global banking sector’s appetite/ability to lend to commercial property (especially office) was doubted, given the loan books of the US regional banks being skewed towards commercial property.

Unsurprisingly, fund managers and office were the worst performers, as all sub-sectors finished in the red. We note that the residential-exposed names more generally delivered positive returns. The AREITs underperformed both the Global REITs (-3.9%) and the general market (via the S&P/ASX 300 Accumulation Index) which was relatively flat (-0.2%) driven by the materials, and communication services sectors.

The ten-year bond yield dropped 55 bps, to 3.3%, whilst the ten-year real bond yields fell by 45 bps, to 0.95%. This is in line with our assumed through-the-cycle real interest rate. This resulted in the implied inflation expectations falling from ~2.5% to 2.35%, which remains on the low-side to what we envisage inflation will be longer-term.

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of:

• A Net Present Value (“NPV”) Discount;
• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”).

The S&P/ASX 200 AREIT Accumulation Index marginally retreated (-0.3%) following January’s stellar start. The markets (domestically and globally) factored that interest rates rises have further to go and that reductions may be moderate. The stronger economic outlook allayed recessionary fears currently, as inflation, whilst most likely having peaked, looks set to remain persistent. The ten-year bond yield jumped 30 bps, to 3.85%, whilst the ten-year real bond yields leapt 35 bps, to 1.40%. The implied inflation expectations remain ~2.5%.

Fund managers were the worst performers, in another stark contrast to the prior month’s performance. Office was the best performing sector domestically, as the metrics reported during February’s results were not as bad as feared (to date). By contrast, office was the worst performer globally.

The AREITs outperformed both the Global REITs (-3.6%) and the general market (via the S&P/ASX 300 Accumulation Index) which was down 2.6%. This was driven by the miners, who were negatively affected by the broad-based jump in the US dollar (the Australian dollar fell three cents in February to US$0.67) which negatively impacted commodity pricing generally.

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs. Overall we endeavour to invest in entities that offer a combination of:
• A Net Present Value (“NPV”) Discount;
• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”). The S&P/ASX 200 AREIT Accumulation Index started 2023 in a complete contrast to 2022, up 8.1%, as the markets (both domestically and globally) broadly ran with the expectation that interest rate rises to not only cease in the near-term but reverse into cuts over the medium term, given the various economic data releases suggest a peak in inflation has been achieved.

Subsequently, this backdrop led to the fund managers being the best performers, a complete contrast to December 2022. Specifically, the ten-year bond yield declined 50 bps, to 3.55%. Ten-Year Real bond yields dropped by slightly more, down 54 bps, to 1.05%. The implied inflation expectations rose once more, but only 4 bps to 2.50%. This trend is consistent with our expectations about the longer-term inflation outlook. We note since the start of 2022, as the markets started to account for the increased likelihood of interest rate rises, the AREIT sector’s performance has become highly correlated with the movements in the ten-year real bond yield. As we come closer to the end of the interest rate rising cycle, we expect rates to stabilise at higher levels than has historically been the case than the years immediately prior and during the pandemic. We are comfortable with an investment environment predicated on positive real bond yields ~1%.

Global REITs benefitted from these same dynamics, performing in line with the AREITs, delivering 8.0%. The general market (via the S&P/ASX 300 Accumulation Index) was the laggard but still generated 6.3%. Utilities was the only sector to register a negative month, given recent government initiatives to cap power price rises.

We continue to target Australian Real Estate Investment Trusts (AREITs) that provide solid fundamentals over the medium-to-longterm that are trading attractively relative to other AREITs.

Overall we endeavour to invest in entities that offer a combination of:
• A Net Present Value (“NPV”) Discount;
• An Internal Rate of Return (“IRR”) Premium;
• Ideally a (Real, not manufactured) Free Cashflow Yield Premium; and
• A Lower Price to Net Asset Value (“NAV”). The S&P/ASX 200 AREIT Accumulation Index finished 2022 down 4.1%. This was reflective of the poor 2022 experienced by the AREIT sector, being down 20.1%. The rise in interest rates was a global phenomenon driving higher real bond yields. This was the key driver of this performance in both the month and year.

Consequently, the fund managers subsector, which traded on higher multiples was the worst hit. The culprit of the poor performance in December was the move by the BOJ to expand the range of the yield curve control targets, implying higher interest rates. This caught the markets unawares. In response, yields rose globally, with the ten-year bond yield domestically being no exception, rising 52 bps, back over 4% (4.05%). Ten Year Real bond yields rose by less, up 42 bps, finishing at 1.59%. This culminated in the implied inflation expectations rising 10 bps to 2.46%, reflective of a trend we expect some further pressures to the upside to in the first part of 2023. The Australian Dollar rose marginally, finishing a little over US$0.68.

Global REITs marginally outperformed the AREITs, delivering negative 3.8%. The general market (via the S&P/ASX 300 Accumulation Index) outperformed the respective REIT indices but was still down 3.3%. All sectors were negative, with both the materials and utilities sectors being the outperformers once more.