Winston’s Weekly: ISPT loses $260m, REITS trading at material discount to NTA

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Winston Sammut, the Director Property of Euree Asset Management, gives his weekly take on the REITs sector.

Paul Sanger: We are talking today with Mr Winston Sammut, an investment manager at Euree Asset Management. Winston has over 40 years' investment experience, including 20 years in the listed property industry. Winston was previously the head of listed securities with the ASX-listed property fund manager Charter Hall Group (ASX:CHC). Winston, welcome back to the network.

Winston Sammut: Thank you. It's a pleasure.

Paul Sanger: Winston, you're now managing a REIT securities fund called the Euree A-REIT Securities Fund. What is the status of this fund, and how is it tracking?

Winston Sammut: The fund's now been going for three months, and it's tracking pretty well. We're happy with the performance. Unfortunately, the sector has come under a lot of pressure over the last couple of months. In September, it was down just over 8 per cent, and in October it was down just over 5 per cent. So, cumulatively, about 14 per cent in two months, down. We outperformed the sector. We were only down around 10 per cent. I mean, we have to be invested in property, but we outperformed. This month, it's been a bit more positive. The sector today, being the last day of the month, the sector is up 8 per cent for the month. Today's the last day, so we'll see what happens at the close, but it's going to be a positive month. It's good.

Paul Sanger: That's good. And, from a broader perspective, what are the themes and trends you're seeing in the property sector?

Winston Sammut: Well, the market's been very much influenced by the direction of interest rates and the many rises that we've had over the year. But, more importantly, the issue is that the sector, the listed sector, is trading at very big discounts to their net tangible asset backing, or NTA, which is really the value of the properties underlying the REITs themselves. Whereas in the unlisted market, that hasn't been the case. The valuations in the unlisted market have not really kept pace with what's happened in the listed market.

However, this week, ISPT, which is a $21.5 billion property owner and developer, whilst it doesn't actually publicise its numbers, its accounts were lodged for 30 June. And having a look at those accounts, it shows that the property component lost $260 million for the year, compared to a profit last year of $1.5 billion. And that shows that there's now an impact of valuations coming down in the unlisted area. So, we're getting closer in terms of the two markets meeting sort of somewhere in between.

Paul Sanger: And you mentioned then that the REITs sector continues to trade at these material discounts to the asset backing. Is this likely to encourage M&A in the short-to-medium term?

Winston Sammut: It is. The issue at the moment is that, obviously, because a lot of the larger entities are trading at discounts to NTA, they can't really issue shares or units because that would be dilutive for the rest of the shareholders. And also, because interest rates are going up, it's a difficult task for them to actually borrow more because the cost is more. But as things start to get better, look better… And at the end of the day, you've got to remember one thing. We've had many, many rate rises — 11, 12 rate rises over the last 12, 13 months — we're at the end of that cycle. There may be another rate rise, maybe two at most, but we're at the end of that interest rate rise cycle.

So, I think what's going to happen is that people will then see that the bond markets are steady, borrowing rates are going to be fairly flat, notwithstanding we'll have higher rates for a longer period of time, but they'll be much more confident about doing things going forward. And so, there are a lot of the smaller listed REITs that are very attractive at these levels. They're yielding 7, 8 per cent, and they're trading at 20, 30, 40 per cent discounts to their net tangible asset backing.

Paul Sanger: And my experience with equity markets, they look forward.

Winston Sammut: Correct.

Paul Sanger: So, I think maybe one or two more rate rises, but equity markets are probably looking six months ahead. So hopefully now, particularly where valuations are, it should in the new year start kick in that more eyes are on the sector.

Winston Sammut: We're very positive about the year ahead, much more so than we have been about this year, and it's for those reasons. Because we're coming towards the end of the journey rather than the start, and there are bargains around. So, it's a matter of picking the right stocks and picking the right managers.

Paul Sanger: Absolutely. And you talked about the ISPT reported losses. Let's talk a bit more. What's the read-through for other commercial real estate players and exposures?

Winston Sammut: We do expect that in the half-year results that we'll see at the end of December, that there'll be another downward adjustment in terms of valuations. It's unlikely to be a huge amount, but it's still in that negative territory. And we see that as being the last of the downward evaluation trends going forward.

Paul Sanger: Got you. And just to finish off, it's also being reported that a merger of ISPT and IFM is a strong possibility. How would this transaction impact the sector, and what could it mean for asset valuations?

Winston Sammut: Well, the merger of the two will effectively result in a much-bigger wallet in terms of the investment that they can make. So, they're going to be a very big player going forward, bigger than they are at the moment. I mean, ISPT is big as is, but it'll give them much more in the pocket, as it were, to spend in terms of acquisitions.

Paul Sanger: Winston, absolute pleasure to have you back in the studio today. Wish you all the best.

Winston Sammut: Thank you. It's a pleasure to be here.

Paul Sanger: Thanks, Winston.


Disclaimer: Sequoia Financial Group (ASX:SEQ), the parent company of Finance News Network, owns a 20% interest in Euree Asset Management.

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