We hold DXS and VCX, across our direct equity portfolios. We are slightly underweight the sector, viewing them as a) attractively valued, but b) long duration assets that tend to underperform when interest rates (here, the 10 year long bond yield) are rising (which we expect to continue).
Still, their typically lower beta and typically (ex extremes like COVID where you have to waive the rent) resilient earnings profile…
…provides attractive portfolio diversification benefits, and so they are usually worth tying up some capital, even in an underweight capacity given the headline view (below are sectoral correlations using monthly returns since 2007).
As a sector, returns have been sub-benchmark since the COVID crisis, as retail and office suffer a mix of WFH concerns, prevalence of online shopping, and the aforementioned COVID related rental waivers granted to smaller businesses, which depressed both earnings (net operating income/funds from operations) and related multiples.
Occupancy ratios remain elevated…
…which has been maintained by markedly higher incentives, and lower like-for-like rent (new and renewed leases, at lower prices). The exception has been industrial REITs (and the fund manager REITs) across industrials (e.g. GMG, CIP) as well as health (ARF) social infrastructure (CQE) and warehouse/storage/logistics (NSR).
Of course, those segments are the expensive ones, with Goodman, Centuria, Arena and National Storage all screening as expensive in both an absolute and sector relative sense.
As well as when regressed against fundamentals.
We continue to prefer to get our REIT exposures in the sub-sectors where the earnings expectations are modest, and, enjoys a cyclical tailwind, which leads us to office plays like DXS, and retail plays like VCX.
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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
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