Winston Sammut, an investment manager for Euree Asset Management, discusses trends across property, valuations, risks of devaluation, M&A activity, and opportunities moving forward.
Paul Sanger: We're talking today with Winston Sammut, an investment manager at Euree Asset Management. Winston has over 40 years investment experience, including 20 years in the listed property industry. Winston was previously the head of securities with the ASX-listed property fund manager Charter Hall Group. Winston, welcome to the network.
Winston Sammut: Thank you.
Paul Sanger: Winston, you're now managing a new REIT securities fund called Euree A-REIT Securities Fund. Can you tell us a little bit how that's progressing?
Winston Sammut: It's going well. We've just launched it on the 11th of August, and the objective is to generate a return of 1.5% after fees over and above the index over rolling three-year periods, and we're very confident that we can do that.
Paul Sanger: Winston, reporting season has just come to a close and across the list of property space, what trends do you see play out?
Winston Sammut: Well, really what happened is a reaffirmation of what's been in people's minds over the last 12 months, and that is that valuations have been coming down, the costs have been going up, primarily driven by the interest rate rises that we've seen month on month over the last 12 months. That's put a little bit of pressure on the bottom line of a lot of the REITs because costs have gone up, valuations have come down, there's a little bit of pressure in terms of their loan evaluation ratios, their gearing, and so whilst the results themselves were as expected, there are some concerns about how much further valuations will fall over the next 6 – 12 months.
Paul Sanger: You say the REIT sector is continuing to ignore current asset valuations and trading at discounts. Do you see this correcting anytime soon?
Winston Sammut: Well, it's been correcting but gradually rather than in one large hit. Probably that's the way that the REITs want to see it develop, rather than come to the shop right at the end. Yes, I do expect valuations to continue to adjust. I'll use the word adjust, downwards. But in the REIT market, the listed REITs are already trading at 20 to 30% discounts to their net tangible asset backing. It's in the unlisted market where the problems are because being unlisted, they're not traded every day and the managers of those entities have been reluctant to adjust valuations accordingly.
Paul Sanger: What sub-sectors do you see as a greatest risk of devaluations?
Winston Sammut: Well, office is definitely the one that is on a lot of people's minds, primarily because it's had two impacts on it. One is the COVID and secondly is rising interest rates. With COVID has come the issue of working from home, and so there are less people commuting and going into an office, so the demand for space should generally shrink, although tenants seem to be at the moment, looking for better quality space. But hopefully, what they're trying to do is to get it at the same rent that they're paying at the moment, which is a bit difficult.
Paul Sanger: Yeah, I hear you. What have you seen on the M&A front this year and what do you think will happen with M&A activity going forward?
Winston Sammut: Well, the problem with M&A activity in the current environment is that for it to occur. A: you have to have the capacity to be able to take entities over and you either need cash or you need to be able to issue securities to raise the cash to pay for that. Because the REITs are trading at big discounts to NTA, it's unlikely that you can actually do it via capital raisings. Now, it could happen by way of selling assets, for the REITs to actually sell assets, but again, there's a problem there because pricing between the buyer and the seller of these assets, there's a very wide gap.
Paul Sanger: Tell me, how is the Euree portfolio positioned across the property sub-sectors and where do you see the greatest opportunity over the next 12 months?
Winston Sammut: Well, we're taking the view that over the next 12 to 18 months, we are going to have a lower exposure to office assets as the markets sort of adjust and somewhat of a underweight exposure to discretionary retail. That's the kind of spending that is not a day-to-day needs-type spending for consumers, but it's I won't say luxury items, but things that you might want to buy or aspire to buy, because interest rates have risen and so it's making it harder for people to pay their mortgage and to spend money. We're concentrating on the non-discretionary retail, which is supermarkets, food, essentials, as it were, and there are a number of REITs that offer those benefits. Charter Hall Retail (ASX:CQR), SCA, Shopping Centres Australia (ASX:SCP). There's a new one now, which is HomeCo Daily Needs (ASX:HDN). They're the sorts of assets that we're looking to invest in going forward. In addition, both retirement living or seniors living and retirement living and childcare, all those areas are government subsidized, so the way looking forward is positive for them, and so we like those areas as well.
Paul Sanger: When you're making these investments, what's the typical investment horizon? You make the investment, is it 12 months? 24 months? 36 months?
Winston Sammut: We generally take a 12- to 18-month view. In reality, whilst we'd like to have a longer-term outlook, the reality is that things change so rapidly these days in the financial markets that to try and predict where we're going to be in three years' time is very difficult, so we have a rolling 12- to 18-month outlook. Each month, we review our positions based on the outlook over the next 12 to 18 months.
Paul Sanger: Winston, absolute pleasure to have you back in the studio again. We'll be keeping a very close eye on Euree and we're sure to catch up in the near future.
Winston Sammut: Thank you. It's a pleasure. Anytime.
Paul Sanger: Thank you.
Ends
Disclaimer: Sequoia Financial Group (ASX:SEQ), the parent company of Finance News Network, owns a 20% interest in Euree Asset Management.
