Property & Infrastructure Funds Unlisted Property Trusts 2020

I don't think its a bad time to take a position in DIF4. I find that unlisted tends to lag when it comes to values being reflected on the way down and also on the way up. The unit price is sitting at almost $1.10 a unit. This fund is now 4 years old. So that's a 10% increase in unit price over 4 years. I wouldn't consider that a big run and think it still has room to grow. With a 6.1% yield and lets say you continue to get the same 2.5% or so growth rate that is not a terrible return.
Factor in the 11 year wale and I would say its a solid and stable investment.

I am overweight property trusts and I am still considering whether I should throw another $100k or so into DIF4.

 

Right, I looked at unit price data from inception and it suggests ball park cap growth of 2.5% pa, provided that no capital was paid out on realised investments...which would put total return in the 8.5% pa range. Gearing at Q3 was 24%, which is below target, so perhaps some gains recently realised?

 

Yeah not sure how that works. From what I understand they do hold some of the income for the purpose of smoothing out distributions. The gearing in their funds tends to drop as they raise funds until they purchase additional assets.
I touch base with the charter hall client rep regularly. Will reach out to him in the new year and get more details on exactly how they manage to keep the keep distributions high when they bring in additional investor money and gearing drops.
Could they be holding onto enough of the income coming in to be able to keep distributions up during such periods?
All I know is they have managed to do it in a number of the funds over the years and never had to drop distributions.

 

You should be thankful that you didn't - DOF's unit price has just about held its ground this year (helped by a small +$17m revaluation of the 169 Macquarie St Parramatta asset in Sep20, an asset it co-owns with POF), while PFA has lost 4.5-5%. So much for the extra 1.5% 'yield' that PFA provides.

 

I just looked up the unit prices of both those funds.
PFA is sitting $1.05 from its peak at $1.09 and DOF $1.54 from a peak of $1.56.
I’m calculating about a 2% additional drop from PFA compared to DOF.
Assuming those unit values are worth anything anyway. It only matters when you are cashing out and I would imagine most people buying into unlisted will be holding it for many years.

Will DOF’s growth rate continue at the same pace in the coming years? Does PFA have more room for growth in its unit price considering the cap rate of its assets? Did PFA drop that extra 2% in value because the income it generates has also reduced?

I don’t know the answer to those questions so I will take the extra 1.5% yield that is guaranteed ( as much as any of the income from these property trusts is guaranteed ) rather than the possibility that DOF will grow an extra 1.5% in value to make up for the lower yield.

Again I am not against DOF. I hold a significant chunk of money in DOF and hope it continues to provide great growth. I hold a slightly bigger chunk in PFA because I feel like it offers as much potential as DOF if not more in the short term.

If DOF outperforms and grows more than the 1.5% yield upside that PFA offers I am happy. If PFA ends up matching or outdoing DOFs growth plus gives me that extra 1.5% yield, I am happy.

Happy all round.

 

Looking at yield alone will burn you in the long run. Yield can be manipulated through gearing and through paying out of capital. The first rule of property investing is quality as quality will outlast any economic cycle and within the Charter Hall stable, POF has the best assets due to it holding first right of refusal on any office buildings over $30m. POF has a yield in the low 4s, a number which would probably deter you. I would invest in POF if i had a choice however it has a $10m minimum entry. Around 1/3 of DOF is invested or co-invested with POF so that's the best option for me as a pleb.

Does PFA have more room for growth in its unit price considering the cap rate of its assets? -- There is a reason for the high cap rates -- Hobart, Canberra and Suburban Perth assets will never trade at the same cap rates as Sydney, Melbourne or even Brisbane CBD.


However at the end of the day, as identified in my 2nd to last post, the big problem with PFA at the moment is that it is drawing in too much funds and therefore these new funds are diluting the unit price as the fund struggles to buy new assets, let alone things which can pay 7%pa. I had a quick look at DIF4 as well and it is also encountering the same problem (unit price leaking lower despite no downward revaluations to underlying valuations) although at least it has been able to pick up quite a few dregs that PIF and CLP have not wanted in 2020. If Charter Hall wanted to act in the best interests of unit holders they would close these funds so that the dilution stops happening. Unfortunately that would mean that fees stop until they come up with other new funds so it is not really in their interests to do so (moreso because they don't hold any units in their retail pleb funds, unlike POF and PIF)

 

A simplified example to clarify what i mean by self dilution:

1 Jan, Year 1
Fund has $100m in assets (property)
There are 100m units in the fund (therefore each unit is worth $1)
31 Dec, Year 1
Properties generate $7m in income
The Fund distributes the $7m to the 100m unitholders, each receiving 7c (7% yield).
Properties stay the same value at $100m, therefore the unit price stays at $1.

1 Jan, Year 2
Fund issues 20m new units at $1 each.
There are now 120m units in the fund, each still being valued at $1 ($100m in property + $20m in cash, divided by 120m units).
31 Dec, Year 2
The fund has sat on the $20m the whole year and has not generated extra income. The properties still generate $7m and are still worth $100m.
The fund still commits to paying 7c to each unitholder, this equals $8.4m
Fund assets now equal $100m (property) + $20m in cash + $7m income - $8.4m in distributions = $118.6m. There are 120m units, so the unit price is now $118.6m/120m units = 98.83c.

1 Jan, Year 3
Fund buys a $8.6m property which is expected to yield 5% or 430k in income
31 Dec, Year 3
The properties maintain their value at $108.6m and the cash balance remains at $10m.
The fund continues to pay out 7c per unit or $8.4m.
Properties generate $7.43m income
Total Fund assets at year end = $108.6m + $10m + $7.43m - $8.4m = $117.63m or 98.025c a share

The unit price continues to go backwards because the new equity does not generate as high income as previously (5% for new properties vs 7% previously) due to properties being more expensive to purchase. The original 100m unit holders are getting a lower return on the fund (via lower a lower unit price) due to the new 20m unit holders. If the fund manager was acting in the original 100m unit holders best interests they would have closed the fund after year 1 however as they do not own any units in the fund and they receive fees based on the size of the fund, they don't really care.

The other way to avoid self dilution but still grow the fund is to only offer new equity as a rights issue and to have a call mechanism for the funds when they are actually needed however this only happens with the proper wholesale funds, and not these pesky mum and dad funds.

 

Ok. So PFA is not perfect and has its flaws. I accept that. But is the dilution issue any different in DOF or DIF4 or any of their other open ended funds? Other than the wholesale funds that aren't available to us so no real point comparing to them?
I understand that PFA is currently holding more cash hence lower gearing, but I believe at times this has been the case for all the open ended funds while they accumulate more assets.
It sounds to me that this is the price you pay being in open ended funds. While it might take some performance away does that make them bad investments?

Second of all you seem to have missed when calculating your figures above the fact that each year income increases as most assets have built in rent increases. I am sure that would help somewhat with the income drag from holding cash during asset accumulation phase. There is also the fact that interest rates have continued to drop over the last few years since the fund was established. Again this would improve income and offset the cash drag.

You mentioned that the assets locations being Hobart, Canberra and Suburban Perth. But looking at at the property portfolio I also see Bourke St Melbourne, Shelley St Sydney, Macquarie Park, Brisbane CBD and Adelaide CBD. And in Hobart I see Hobart CBD asset with a 10 year lease to key tenants being Deloitte and State Government. I also noticed a number of the assets it owns in partnership with other CH funds such as CLW, DOF and CPOF. So while not all the assets are prime A grade locations I would say that's a decent mix of assets and locations for the yield on offer.

Lastly while I agree the way CH operates its open ended funds has some flaws they still have a history of delivering decent results for investors. I have been invested in a number of their funds over the last 5 years now and even with the mentioned flaws of the funds I am satisfied with the results so far.

 

What interest rate does CH pay on its debt? I would have thought having a lower debt would be a good thing, but I am also curious as to why the unit price has been drifting lower. I actually recently invested more funds into PFA so I am hoping for some long term upside.

Personally my feeling is this work from home, abandon the cities mentality will be short lived. Productivity issues will likely make employers force employees back to normal workplace environments once vaccines are widely available. If 'social distancing' is still needed, then companies will need even more floor space, not less. So maybe a net gain for offices down the line???

Also correct me if I'm wrong, but hasn't there been some very good sales of Cbd office buildings to Singaporeans and other overseas investors recently? Obviously these buyers are still confident.

 

I couldn't tell you exactly what CH are paying for debt right now but if you really wanted to know I am sure you could find the rate. Yes lower interest rates are a good thing for property trusts.

The lower unit price is Charter Hall reflecting some of the Covid downside on the asset class. I think the slight drop in unit price is reasonable considering market uncertainty. It has dropped a few percent. The asx dropped 36% at one point and is still over 5% lower than since pre covid.

Personally I wouldn't put to much emphasis on the unit price other than when looking at buying more units and giving consideration to how much you are paying for those units. From a portfolio value point of view I don't even look at the unit price at it means nothing until the fund is looking at selling down its assets and returning investor capital. I am more interested in the continued income I am getting from them. Either way its not like you could sell out, so what difference does it make if its up 5% or down 5% today.

Yes I have also read that there have been a few buildings selling well with no affect on price from Covid. I also don't think Covid is going to end up with everyone working from home and the end of the office. People get very excited with new fads. WHF is the latest sensation. I have been working from home for the last few years. Until Covid it was frowned upon and people treated it as if you were not at work when working from home. Now its the best thing ever. Everyone working from home should get a prize.

Soon enough everyone will forget about this new Craze WFH and move on to some new Tik Tok challenge.

 

Thanks @Nickjjt1 and @Big A for your posts, I understand better now where PFA currently stands and the underlying pricing mechanisms. I will definitively in priority try to grab some COF if the share market goes down a little, and might look at PFA in a couple of months. Really appreciated your thoughts anyway.






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