1. What were the best and worst performing stocks under your coverage in 2019?

Pete Morrissey (PM), CEO Real Estate Securities

Among retail REITS, large format retail (LFR) landlord Aventus (ASX:AVN) returned 43%* for the year. Not only was it the best retail AREIT performer but the fourth best performing AREIT overall. AVN highlights the divergence in performance that is occurring between different types of retail assets. Top quality management, a 6.0%*-plus dividend yield and sustainable earnings growth means AVN is likely to remain one of our biggest relative overweight positions (>4.5x index weight) in the AREIT Fund portfolio.

At the other end of the spectrum was Vicinity (ASX:VCX), with a disappointing 1.9%* total return for the year. Fortunately, this didn’t impact the APN portfolio too much. In early 2019, expecting a difficult year for the stock, we reduced our position, taking it from an overweight to an underweight holding. Assisted by adverse media headlines, Vicinity’s stock now yields over 6.1%*. As owners of Australia’s best shopping centre (Chadstone), a portfolio of strongly-trading Direct Factory Outlets (DFO’s) and other quality centres, we are comfortable with the stocks contribution to the portfolio.

Corrine Ng (CN), Portfolio Manager, Asian Real Estate Securities

Among stocks in the APN Asian REIT Fund portfolio, the best performer was data centre owner Keppel DC REIT, rising 53%* during the calendar year. This was a great result for the fund, Keppel DC being our largest overweight position. We still love the niche nature of the sector, its defensive operational profile and above-average distribution per unit (DPU) growth. Last year, an equity raising allowed the acquisition of two assets, both highly accretive to DPU, demonstrating management’s ability to operate in shareholders’ interests.  Its inclusion in the FTSE EPRA NAREIT Global index in September 2019 no doubt also aided performance.

Fortunately, the fund’s worst performing stock barely impacted portfolio performance. We held a small, underweight position in Hong Kong-listed Champion REIT due to its high-quality assets, compelling valuation and dividend yield of 5.4%*. The social unrest that unfolded in Hong Kong hit sentiment (and therefore valuations), despite the fact that there hasn’t yet been a real impact on Champion REIT’s earnings or distributions. In the scheme of things, Champion REIT’s return of -4%* in 2019 wasn’t at all bad.

Mark Mazzarella (MM), Portfolio Manager, Real Estate Securities

The best performing stock from those I cover within the S&P/ASX 300 AREIT Index was diversified landlord, investment manager and developer Mirvac Group (ASX:MGR). It achieved a total return of 47.5%* through 2019, more than double the total return of the index as a whole. A few years back, Mirvac’s management team set a plan to organically grow its office exposure into one of the highest quality nationally, while shrinking its retail mall exposure to focus on more resilient urbanised locations. In 2019 year that plan bore fruit, assisted by the sector-friendly election result in May, which boosted the outlook of the residential development business.

In my area of coverage, GPT Group (ASX:GPT) was the worst performer, delivering a total return of 9.3%* through 2019, underperforming the index by 10.3%.

Matt Coleman (MC), Senior Investment Analyst, Real Estate Securities

LaSalle Logiport was one of the strongest performing JREITs, returning 52.0%* for the year whilst Mitsui Fudosan Logistics Park REIT returned 55.6%* over the same period continuing the strong performing industrial theme.

Retail remains a challenge though, although some JREITs delivered dividend per unit (DPU) growth through asset replacements. The October increase in the Japanese consumption tax from 8 to 10% isn’t helping, although most retail REITs expect this to normalise, as we saw with the previous increase.

After a poor period, the hotel market is delivering some interesting opportunities.

Since 2013, there has been a big rise in inbound tourist numbers. This year, 35m+ people are expected to visit Japan, driven by the return of South Korean tourists and the Tokyo Olympic Games with the outlook beyond this event looking positive.

2. What were your most salient general observations over the past year? 

PM: Last year, the divergence in sentiment towards different kinds of retail assets became quite stark. As noted above, Aventus is a great example of a portfolio of well-managed assets with predictable and sustainable rents. Capital values are therefore solid and growing sustainably. Neighbourhood and convenience-type centres owned by the likes of Shopping Centres Australia (ASX:SCP) are seen in a similar light.

More …