This property fundie warns REIT investors to do their homework
By Joanne Tran and Emma Rapaport – AFR – original article
Pengana Capital portfolio manager Amy Pham was seven years old when she was living in a refugee camp after fleeing war-torn Vietnam to avoid persecution from the communist regime.
In Australia, Pham’s mother worked two jobs cleaning hospitals and sewing in a textiles factory. Before she left Vietnam, she was sent to a re-education camp for being a businesswoman.
Today, overseeing Pengana’s high-conviction property securities fund, the fund manager knows that difficult and unpredictable times in the market can be braved out. After all, it’s what happened in the global financial crisis, during the coronavirus pandemic, and now, the fastest monetary tightening cycle in a generation.
Pham says the fresh collapse of several US banks should serve as a reminder that the sharp rise in interest rates does not only affect consumer confidence and mortgage rates but also the cost of capital and liquidity.
“The implication for REITs is that there will be more focus on gearing levels, particularly in sub-sectors that are exposed to a higher risk of asset devaluation,” such as offices.
She says this is not a repeat of the GFC. Average gearing for the sector remains low at 27 percent, and the source of debt is a lot more diversified.
“The problem is that book values have barely moved even when rates have doubled. Valuers are sitting on the sidelines and waiting for transaction evidence before making any material write-downs on asset values.”
At the moment, there is a large gap between buyers’ and sellers’ expectations. “Once there is price discovery, we expect transaction volumes to pick up with downside risk to office valuations, pushing a lot of these REITs to the upper end of their gearing target.”
Higher rates mean that the property sector could be looking at a significantly higher cost of debt. Pham says the repricing in the bond market is largely done now that inflation is slowing.
The most appealing stocks to the fund manager are the landlords to smaller non-discretionary retailers. She thinks these are good value because this cohort can consistently grow their earnings, whether the economy experiences recession or not.
“The ones that are in the REITs have got opportunities to expand into car parks, expand into fulfillment, click-and-collect. There’s room for growth … you’ve got convenience, but you have also got the necessities of health care and childcare attached to that shopping centre.
And in a rising cost of debt environment, she is all about cashflow.
“On the one side we look at the cost of debt. But also on the other side, we look at the rental growth. If they’re able to grow their rents in order to compensate for higher cost of interest, then I think we’ll be fine.
“In a sector or in a portfolio where they’re not able to grow their rents and whilst their cost of debt is continuously increasing, you have a problem.”
For this reason, the industrial sector is particularly attractive to Pham. “We like logistics and that’s only because logistics in Australia is still very under-rented.” Centuria’s REIT for example demonstrated rental growth, which if sustained can keep up with the cost of borrowing.
For an investor willing to look through the cycle, a strategy based on simply picking up property trusts trading at steep discounts to net tangible asset value, or NTA, is riddled with problems.
“I think that a lot of the REITs now are trading at discounts to net tangible assets,” says Pham. “And I think that people who go into investing in REITs just based on discount to NTA there could be a risk to that NTA. You need to look deeper. The only way that you close that discount to NTA is through earnings – that’s the only way.
“Investors should look at the quality of earnings.”
A natural affinity for maths set the fund manager on an academic course early in life.
“I spoke little to no English when I was here, so I decided to focus on that.”
She ended up finishing a double degree in maths and economics before starting her first job in finance as a quantitative analyst at Legal & General during the 1990s.
While an equities analyst at Perpetual from 1996-98, her natural aptitude in numeracy and “pure numbers” meant she was given all the stocks that were cashflow-based where she had to conduct analysis on discounted cash flows.
Infrastructure, retail, utilities, and REITs were her hunting ground when veteran stock Perpetual picker and Airlie Funds Management co-founder John Sevior said to her, “I think you’re doing a great job in the REITs sector, why don’t you takeover and manage the fund?”
And she did. Her numbers caught the attention of Charter Hall’s Greg Paramor, who asked her to work for him on a specialised strategy.
Pham is excited to see how many more females are winning senior roles on the buy side.
“What I’ve learnt especially with having children is to prioritise things. You just can’t spread yourself too thin.”
