Property & Infrastructure Funds Unlisted Property Trusts 2020

While I haven’t asked specifically about the price movement I think I have a good understanding of how they operate. I think the unit price of PFA has dropped a few cents due to COVID. To be honest I think they have been conservative and you could have justified a much larger drop. Thing with unlisted is you don’t get the daily market price discovery. Let me tell you if PFA was a listed fund it would be priced much lower. Take a look at CFO from centuria. See similarities in these two funds. CFO has been hit hard and is still trading at something like a 10% discount to NTA.

The regular price movement in this fund is CH trying to mimick a listed trust. Some of the increase coming into the end of month is reflecting the income building up in the fund in preparation for the monthly distribution. Any price movement above that I believe is the manager factoring in valuation increases they apply in between the offical independent valuations.

At the end of the day the assets are still collecting the rent and leases are holding up. So in my eyes I don’t think it’s value has changed much. Maybe the small drop in price is justified for the additional future risk and uncertainty around office demand.

If you are considering PFA I would look at CFO. The upside of unlisted is not paying a premium to NTA, but right now you get the advantage of listed and as a bonus a discount to NTA.

 

When I first got the details of WPS1 it didn’t excite me. But as I am getting the funds back from DAT and DAT2 as they have sold the assets I once again thought should I consider WPS1.
Looking over it again, I still can’t do it. 4.5% yield is way to low. I get that it’s not all about yield and potential growth is as important if not more important. But there is no guarantee on growth. Look what has been hit hardest in COVID. Prime CBD office and retail has been hit hardest. Who would have thought.
I don’t hold much retail but I am in 2 retails asset funds with fortius. Asset one is Albany creek square. A suburban shopping mall in QLD. The other is The Barracks. A shopping centre in the heart of Brisbane across the rd from Suncorp stadium.
Even though retail is on the nose you would expect prime CBD retail will remain in demand. Since COVID the fund with the suburban mall has performed better than the CBD centre. COVID has driven people out of city centres. The Suburbs are pretty much back to normal.

So I’m taking the money I get back from the CH funds that are wrapping up and sticking into equities. Finally rebalancing away from unlisted property to holding more equities.

 

I guess the thing is do we expect greater demand than say 2019 in the near to medium term? my feeling is no. At cost of capital say 2.7%, a 4.5% yield with an in my view short period of time to realisation period, my view is seeing more downside risk than upside. This is despite me being really keen to “do something” with equity and fill a gap in asset allocation (AU Commercial).

 

I agree. Actually been thinking along similar lines lately. Keen to start using some cheap debt to increase return. Problem is what do you put it into. I am keen to keep piling into equities but with lots of noise about further possible corrections I would be annoyed if I use debt and it gets hit shortly after.

So I am thinking about using some debt to put more money into the AU mortgage syndicates. I am still a fan of this investment. Problem is trying to find syndicates open to put money into. As soon as something opens, investors are throwing money at them. I keep calling the rep at AU and he tells me just hold on to your cash and I will let you know when there’s space available to allocate the money. Crazy times.

 

Part our problem is the Blaise Pascal thing ;



My 1st level thinking on mortgage syndicates is that it’s a similar type of risk as commercial property ; with return as income rather that capital and income. You’ll get the yield commensurate with risk taken. Quality 1st mortgage at one end and mezzanine at the other end.

 

Lol. So true. Can’t sit still for too long.

with the mortgage syndicates, I agree a pure capital investment with no growth is not ideal from a tax perspective. I mitigate that some what by holding this investment in a company. So 30% tax rate.
Second of all even though I don’t necessarily need any more primarily income generating investments, I like them. I love seeing money appear in my account regularly. Then I can keep busy working out what to invest it in.

All the AU loans are 1st mortgages only with around 65% lvr. I wouldn’t touch mezzanine financing. Another way I manage risk is I am invested across approximately 20 different syndicates at any time.

I’ll give you an example of one I’m about to go into tomorrow. This mortgage syndicate is actually with Fortius and not AU. First time I am going into a syndicate with a manger other than AU. Though I do hold a few unlisted property trusts with Fortius, so I am familiar and comfortable with them.

It’s a residual stock loan. Developer finished an apartment building in surry hills and has 2 outstanding apartments unsold. They are lending against these 2 apartments on a 24 month term with a 70% lvr, paying 7.25%. In 2 years you have collected a combined almost 15% return. To end up with a negative return they would have to sell the apartments at less than 55% of what they valued them at today.
I am comfortable with those numbers. The lvr is on the high side at 70% but this is not a construction loan. The build is complete and tenanted while they try and sell them.

 

Nevertheless, Australian Unity has been around doing its thing for a very very long time. Has it ever had a product (and it has/had many) go belly up or go real bad?

 

Speaking with my wife this morning, her view ;

Fixed realisation period sucks. Just buy a small industrial unit directly and deal with the single asset risk and admin.

OR

Because you feel you need to do something put 50k in your personal brokerage account and buy Afterpay or “some ****”

Ha.

 

Thanks for your views, much appreciated. I guess you mean COF and not CFO? I bought COF back in April when it was very low, should have bought more in hindsight, but anyway. My two holdings are PFA for unlisted and COF for listed, I believe 2 of the best property funds. I was indeed assessing which one I should buy more of, and trend from Feb 2020 is that COF is on an upward trend, and PFA on a downward trend, and with Covid finishing I thought it could be a good idea to put money in PFA at the moment. COF's yield is slightly better (7.8% over 7%) but I guess another good option would be to buy a bit of both ;-)

 

And that's why I like AU. Big player that's been around for a long time.
I looked up their history with debt funds. During the GFC they had a similar fund but pooled rather than individual syndicates. GFC hit and everyone ran for the doors. They had to freeze redemptions and it took a few years to get investors their money back to them. But from what I understood they did return all capital with no losses.
Problem I see is that people didn't understand the product and maybe by the managers having redemption options in place investors believe they can get their money out at any time. In the current version they have made it clear that there is no redemptions until the loan asset is sold and that the investment term could extend in circumstances where development and sale of asset is delayed.

As long as you understand and accept that then I see it as a good investment option.

 

Maybe just do more of the same. If you have a plan in place with your current asset split just add any available cash into those investments. Yes I know that's boring.

If you want to add something different but nothing stands out and grabs you as a good option maybe that's a sign to do nothing.

I think wifeys option 2 is her telling you take the 50K and go outside and play and stop bothering her. Sounds like a smart women.

 

Yes sorry COF. Well done getting in there and picking some up in April. Still think its a decent buy today. Problem is your price point is now based on what you paid in April and anything above that will feel like a bad deal. But 7.8% over 7% plus the liquidity of listed over unlisted makes COF a more attractive proposition. Thing is I reckon you will still be able to buy PFA at a similar price in 6 months time. COF is trading at a good discount. Who knows how long that discount will last.

 

Yann, i wrote a few things on Charter Hall's PFA fund on the last post of page 6 and the start of page 7 in this thread. I struggle to comprehend why someone would choose to invest in PFA over the Charter Hall DOF fund other than the fact that PFA has a higher headline yield. The overall portfolio of PFA is much worse than DOF (despite attempts to rectify this) and as mentioned in one of the previous posts, 1/3 of DOF is invested or co-invested with the flagship Charter Hall Prime Office Fund (POF).

Despite this none of the PFA assets were revalued downwards for 2019/20FY - in fact most showed a small uplift. The actual reason why the unit price is falling is self-fulfilling:

Unsophisticated monies continue to look at the 'yield' of PFA and piled 409m into the fund in 2019/20FY and a further $26m from 30 June to 3 Sep according to the annual report (DOF: net ouflow 64m due to the 5 yearly liquidity offer and +$5m from 30 June to 3 Sep). I suspect that some of the DOF 5 yearly liquidity offer went into PFA, again for reasons i struggle to comprehend.

The increasing amounts of monies into PFA causes a problem for the fund - the application monies are used to repay its already low debt (gearing 18% vs DOF: 35%) which is diluting the unit price as these funds need to pay out at 7%pa. Any new properties that they do buy, and remember POF has first right of refusal for any properties >$30m, are obviously not going to have an unlevered yield of 7%pa.

So something has to give - they either close the fund (temporarily or permanently) to new applications to stop the self dilution, they reduce the headline yield, or they continue as is letting people in at 7%pa and cannibalizing the unit price in the process.

 

Maybe.

If you look at the hardest hit areas since Covid and its the CBD locations. I am also a big fan of DOF and have a significant holding in it. But if I was adding anymore right now I would go PFA over DOF. I remember DOF early on did not look to dissimilar to PFA does now. I feel like DOF has already had a strong run in the last few years and don't think there is much growth in the near future.

I agree the gearing ratio in PFA is getting low as they keep accepting more money. Again I believe this happened over the years with DOF while they collected cash and waited to disperse it.

Maybe a bet each way is the best option.

 

Has the DOF unit price been affected by COVID? I don’t look at the unit prices that often. That’s the thing I like about unlisted. Unit prices don’t move much and it doesn’t matter cause you can’t sell it anyway.
Won’t you have another opportunity to sell out a DOF as they do regular liquidity events?

 

Thinking about this more over the weekend ; I think that DIF4 is likely the pick of current CH open investments. I believe it is more likely that the industrial portfolio valuation (unit price) is closer to a marked to market value rather than office assets even though the arguably have a similar valuation methodology. The rolling 5 year term is also significantly better than the fixed term of WPS1. And further, at least you know what you are getting - industrial assets, vs. allowing CH free reign on asset selection and potential for agency risk.

Keen for any thoughts on this.