The Novel Coronavirus (COVID-19) pandemic has seen most financial assets sell-off across the board, including securities in the traditionally defensive listed property sector. How will landlords fare?
How is the property sector placed?
The Novel Coronavirus (COVID-19) pandemic has seen most financial assets sell-off across the board, including securities in the traditionally defensive listed property sector, as investors grapple with how the drastic government and central bank responses to the crisis will augur for property landlords in the shorter term.
The unprecedented virus containment measures implemented by governments globally have led to widespread expectations of a forthcoming global recession. This has understandably caused property securities investors to shift their minds back to the experience of the Global Financial Crisis (GFC) of 2007-08. In this period, a number of distressed property companies collapsed under the burden of their shorter-term debt obligations as asset valuations moderated and debt markets closed, which made it very difficult to refinance expiring facilities.
There are undoubtedly some significant near-term headwinds facing the cash flows of certain listed property sub-sectors. However, without downplaying the severity of the current health and economic crisis, things are very different this time around, as the sector entered this crisis in much better shape than it was preceding the GFC. Boards and management teams have largely learned from the lessons of the past and in the years following the GFC have resisted the temptation of cheap credit and shored up their balance sheets considerably through equity raisings and asset sales.
As such, we believe the sector is well positioned, with stronger balance sheets than in the past, which gives companies an important capital buffer to help them weather the unforeseen headwinds that have emerged during this crisis. Furthermore, while there is limited transactional evidence to date, we do not expect significant declines in many private market valuations, and have not yet witnessed any forced asset sales or extensive capital raisings arising from distress like those seen in the GFC.
The robust capital position of the sector is clear when assessing how its level of indebtedness has fallen over time. The Gearing (Debt / Total Assets) Ratio of the sector has decreased significantly in the last decade to 40%, while the sector’s Interest Coverage Ratio has more than doubled to 4.7x in this period. This indicates that the sector is much better placed from a solvency perspective than it was preceding the GFC.
Figure 1: Sector leverage - last 15 years
Source: FactSet from 31 March 2005 to 30 April 2020. Sector refers to the FTSE EPRA/ NAREIT Developed Index. Chart reflects a quarterly time series except for the most recent data point. Interest Coverage Ratio refers to EBITDA / Interest Expense.
How is our strategy positioned?
At First State Investments, the rigorous stock selection process utilised by our Global Property Securities team has an overarching emphasis on capital preservation. We only invest into high quality urban infill assets, through REITs and companies that are in a financially strong position with robust balance sheets, substantial liquidity and minimal near-term refinancing risk.
Our exposures are currently well within their debt covenant limits, have fully funded their near term commitments and generally have ample access to credit facilities. Moreover, the REITs and companies we invest into predominately finance their debt books with unsecured debt, meaning their assets cannot be seized by lenders in the worst-case scenario of insolvency.
The far-reaching impacts of this pandemic could not possibly have been envisaged earlier this year. However, due to our prudent investment process, our strategy entered this crisis in a markedly stronger positon than the broader sector, with a considerably lower level of gearing and a much higher rate of interest coverage.
Figure 2: Gearing - Debt/Total Assets
Chart depicts the Debt / Total Assets Ratio of the Colonial First State Wholesale Global Property Securities Fund and the FTSE EPRA/NAREIT Developed Index. Chart reflects a quarterly time series except for the most recent data point. Source: First State Investments and FactSet from 31 December 2013 to 30 April 2020
Figure 3: Interest coverage ratio
Chart depicts the Interest Coverage Ratio (EBITDA / Interest Expense) of the Colonial First State Wholesale Global Property Securities Fund and the FTSE EPRA/NAREIT Developed Index. Chart reflects a quarterly time series except for the most recent data point. Source: First State Investments and FactSet from 31 December 2013 to 30 April 2020
The securities held in our strategy also have minimal refinancing requirements over the next 3 years and have an average debt maturity of 7.0 years, curtailing the risk that the portfolio could be materially impacted by dysfunctional credit markets. Irrespective of this, we have witnessed a lot of refinancing during this crisis, which indicates to us that credit markets are still very much open for quality property companies with strong balance sheets.
Moreover, not only is our focus on top quality assets owned by landlords with robust balance sheets, but on top of this, our largest exposures are to the sectors that are expected to be relatively resilient throughout this crisis, including residential assets, office buildings, logistical warehousing, data centres, self-storage facilities and healthcare assets such as hospitals.
While the COVID-19 situation is continually evolving, at First State Investments we are confident in the strength of the global property securities sector, and to a greater extent, the strength of our strategy. We believe that many securities in the listed property sector have been materially oversold, as the extent of the re-pricing does not reflect the long economic lives of many of these assets, which are typically underpinned by secure, long-dated and recurring cash flows.
This ultimately gives investors with a long-term horizon the opportunity to invest into what we believe are high quality businesses at material discounts to their intrinsic valuations - many of which will make it through this crisis and we believe will deliver solid returns for many years to come.
This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 and as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933. It is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever.
This presentation is issued by First State Investments (US) LLC (“FSI” or “First State Investments”) a member of MUFG, a global financial group. The information included within this presentation is furnished on a confidential basis and should not be copied, reproduced or redistributed without the prior written consent of FSI or any of its affiliates. First State Investments funds are not registered for sale in the US and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First State Investments’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results. This material is provided for information purposes only and does not constitute a recommendation, a solicitation, an offer, an advice or an invitation to purchase or sell any fund and should in no case be interpreted as such.
Any investment with First State Investments should form part of a diversified portfolio and be considered a long term investment. Prospective investors should be aware that returns over the short term may not match potential long term returns. Investors should always seek independent financial advice before making any investment decision. The value of an investment and any income from it may go down as well as up. An investor may not get back the amount invested and past performance information is not a guide to future performance, which is not guaranteed.
Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon First State Investments’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Actual returns can be affected by many factors, including, but not limited to, inaccurate assumptions, known or unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to be materially different. Readers are cautioned not to place undue reliance on these forward-looking statements.
There is no certainty that current conditions will last, and First State Investments undertakes no obligation to publicly update any forward-looking statement. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of FSI.
The comparative benchmarks or indices referred to herein are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First State Investments. Apart from First State Investments, neither the MUFG (“the Group”) nor any of its subsidiaries are responsible for any statement or information contained in this document. Neither the Group nor any of its subsidiaries guarantee the performance of any fund or the repayment of capital by any fund. Investments in a fund are not deposits or other liabilities of the Group or its subsidiaries, and the fund is subject to investment risk, including loss of income and capital invested. For more information please visit www.firststateinvestments.com. Telephone calls with FSI may be recorded.
The First State Investments logo is a trademark of the Commonwealth Bank of Australia or an affiliate thereof and is used by FSI under licence. Copyright © (2020) First Sentier Investors
All rights reserved.