Property & Infrastructure Funds Unlisted Property Trusts 2021

I don't get the LWF performance. It is a hodgepodge of properties that could be slotted into the various other Charter Hall listed/unlisted funds. A 7.6 year WALE is no longer than any of the other funds either.
Also, won't the unit price of these funds slide as the year continues and they divide up recent purchases among the unit holders?

 

Yeah not a fan of LWF myself, hence why I don’t hold it.
Not sure what you mean by divide up recent purchases among unit holders.
Are you talking about when they purchase a new asset in a fund and the purchase costs dilute the NTA to some degree?

 

In the last CH Direct Insight Series (live video, but with submitted questions), the CEO was asked a question as to why the PFA fund unit price was decreasing. He answered by stating that the new assets needed to be divided between the unit holders hence the temporary decrease in price. I did not quite understand the answer and it may very well have to do with the dilution of the NTA.

 

@Big A hope you don't mind. Do you have equal allocation to DOF, PFA and DIF4.

I know you like DIF4 the most.

 

No not even. I’ll give you an idea using some numbers that represent what I would have put in. Values would be different now as they have appreciated at different rates and some I have held longer than others.

DOF was purchased first. Let’s say I bought 6 units of dof.
PFA next and I bought 10 units.
DIF4 last and I picked up 5 units.

It’s not that I like PFA most that I purchased more of PFA. Some of the holdings were bought in a few parcels rather than all at once on first purchase. DOF has performed best but as its price went up quickly and early on I always felt the price was already high and never added any more.

PFA looked more attractive at the price and yield compared to DOF before COVID hit.

Today DIF4 looks to have the most potential in the near term.

Different funds look attractive at different times. I also hold DIF3 and let’s say I bought 4 units in that.

I also held both automotive funds with charter hall before they sold down last year.

Overall I have most exposure to office assets. I hold office funds with centuria and also Fortius. Probably too much office. It’s coming down slowly. Centuria are about to unload one of their office asset funds and return cash. No more property trusts for now and I’ll keep adding into the VAS & VGS pile.

 

What he meant was that if a fund buys an asset, it has to pay stamp duty and all the other taxes/fees associated with the purchase.

Lets just say a fund purchases a $100m asset and the stamp duty + costs equal $5m. For a single asset closed end fund and lets take the Centuria example, the full $5m gets allocated to all unitholders straight away. If the fund raised 105m units at $1 ($100m to pay for the building, $5m for the expenses), the NTA would be ($100m asset / 105m units) = 95.24c.

However for open ended funds allocating the costs to existing unitholders is unfair. That is because Jo Blogs could invest in the fund tomorrow and benefit from this new asset while yesterday's unitholders got slugged the full stamp duty. So instead, open ended funds tend to amortise the stamp duty over time, say 5 years. In the previous example, they would amortise the $5m across 1825 days. If the fund does not purchase any new assets and does not attract further funds, the NTA falls by $2,739.73 everyday for the next 5 years. That way Jo Blogs will equally wear the stamp duty costs.

There is another reason why open ended funds like the Charter Hall Funds fall in value over time if people keep on piling money into the funds, all other things being equal. Charter Hall won't admit this one as it won't be in their interest to close the funds. I tried to explain it in the below link. In short, new unitholders have to be paid distributions. If the fund cannot find new assets, it has to pay the distribution out of capital.

Unlisted Property Trusts 2020 [Property & Infrastructure Funds]

 

My original plan was when I bought DIF4, with my available funds 65% to DIF4 and 35% to PFA 35%. But changed my mind and went 65% allocation with DIF4, holding 35% funding for now thinking about buying direct shares like Costa, IOOF, AGL and Alumina.

Good to hear.

I was also considering Sentinel - Tuggeranong, familiar place to me. Many years ago I was working in one of those neighboring office. Being familiar with the place doesn't make it a special investment grade , and thanks for your inputs about Sentinel.

 

Just a note on this. Initial research is not positive. From what I’ve seen from past IMs that I’ve requested

50-60% LVR (good for the risk hungry, so ok for me)
3% Acquisition fees….hmmm ok
7-8% cash yield, ok to be expected for leverage and asset quality (not A grade!)
0.5-1% management…ok
20-25% of cap gain as performance fee, no hurdle …yeah nah

I’m actually leaning towards diving into small commercial directly targeting 15%+ IRR as an active business, with a view to future syndication at the moment. Unsure though as to whether it’s worth the effort in comparison to other opportunities.

 

I used to do some work (including assistance with due diligence for acquisition). They are a mixed bag.

I currently do invest with Quintessential. Their fees are high, but they have a good track record of returns. I view them more like private equity (with fees and return expectations to match) in property.

However, if you do go down the direct path, and want to do a small syndicate, please keep me in mind!

 

I can see for most operators it’s just about getting the most FUM and free carry on the asset value. This means many are not overly discerning with the assets bought and value add opportunities. That’s not what I’m after….I could do a small scale version of that myself with enough homework.

What I am really after is those operators that are value add focused, who will take on opportunities that lead to highest IRR, buildings that have been neglected, reposition, redevelopment opportunities etc. Problem is this is hard work, with plenty of uncertainty around outcomes and not as scalable as buy-hold so fewer operators do it. The other thing for me is from what I can tell very few operators will invest their own balance sheet into projects. I’d want to see alignment there.

Probably small syndicates where operator is heavily invested and needs more equity to fill out the capital stack is what I’m after. I’m in one of those now, and would look at others but I don’t have the connections yet to have a steady stream of things to look at, and that’s probably the nature of these things…friends and family first.

Took a look at QE, they seem to fit the value add mandate cheers.

 

You could do worse things with your money. Overall I don't think you can go too wrong with Charter Hall. They might not shoot the lights out but I see them as a relatively safe and stable asset manager.

 

Didn't think you would find much unless you are willing to bet on cowboy operators.

I like the DIY option but will the effort deliver a high enough return above and beyond a vanilla Charter Hall fund? Most of the charter hall funds are doing 10%-15% returns if the most recent valuations are anything to go by.

 

Yeah but those recent results are based on large asset revaluations / cap rate compression. Long term IRR on those funds is expected to by 8-9% starting from now.

When I say 15%, I’m talking 12% IRR on cash + 3% CG, anything more a bonus. But I’d only do it as a business with a 20 year time horizon because the game here is to build a portfolio of multiple assets using cash out from CG / loan reduction of earlier properties. I understand how this is done broadly, but as you say if you only want limited exposure then obviously putting money in an product is easy and makes sense

 

Yeah fair call. I don't see the Charter Hall funds getting anything above 10% in the next few years considering the run they have just had. Never say never though and after a few years of average returns they might have another solid run.

12% on cash plus some CG would sure be a nice little earner. I am not against something like that compared to a vanilla charter hall fund. I stick with Charter Hall because doing something like your suggesting would be above my level of expertise. If its something you are well versed in then its worth looking at. I would be interested in hearing about what you find if you end up exploring that option.

It could be the PC unlisted property trust.

 

Yes a LOT to learn but I’ve got time now. My idea is that I would seed a company with cash and run this as a stand-alone business, totally seperate from passive investments. I haven’t dug deep enough yet to understand my appetite. I’ll keep you posted, will get that coffee once ex lockdown.

 

Let us know when Falcon REIT launches

 

Hi @Big A

You seem to respect Charter Hall management, have you ever considered holding the headline stock?

Here is a chart of CHC vs DOF(chose DOF for comparison to get length of history)

If you can handle the volatility, managers are a great leveraged play on their funds.



The comparison is with distributions re-invested. Total distributions over the comparison for CHC was $121,500 and for DOF $102,500.

CHC wins on income and total return but it comes at the cost of volatility.

Disclose I have position in CHC and also GMG which I see as another leveraged play on real-estate development/investment.

 

You are 100% spot on. A while back I did realise that had I just put my money into CHC rather than all their different unlisted funds I would be ahead.

Unfortunately as a property investor who came across to equities I made plenty of rookie mistakes. I mistook and misunderstood volatility for risk. Coming from resi we seem to have this misunderstanding that the daily price movement of shares compared to property equals higher risk. This was the appeal of unlisted. Unlisted felt a lot like resi.

Now that I understand, that volatility does not equal risk I would have done a few things differently.

I look at my portfolio as two different pots. I have the high and relatively stable yielding with low volatility part. That's unlisted property and the mortgage syndicates. The job of this pot is to provide me with income to maintain a high standard of living with some buffer for when yields may drop. In the good times such as now any excess income from this pot is being put into pot no.2.

Pot 2 is the equities. All work earned income goes into pot 2 plus all excess income from pot 1. This pot is all equites and as I rebalance it will be mainly VAS & VGS. This pot will hopefully remain in full DRP mode permanently allowing it to continue to grow regardless of any income flowing in from other sources.

In my mind this 2 part portfolio makes sense and allows me to continue sticking money into equites with the auto pilot mindset.

 

Any thoughts for a small direct investment from the equities pot?

I was just curious if you had ever thought about trying to utilise some of the knowledge you have in relation to the fund managers from an equity perspective.

No need to explain why you might not do it. I get it.