ASX Property investments - Atlas High Income Fund update
We have recently spoken with the portfolio manager at Atlas Funds Management for an update on the portfolio within the High Income Property Fund (AFM01).
Here is the summary of our findings:
1. Portfolio exposures
Reduced Retail - Going into CV-19 the portfolio had more exposure to Consumer Discretionary, or retails, than today. While in March AFM01 had an ‘underweight bet’, meaning the portfolio was holding less exposure than the index, AFM01 now has even less exposure to retail and shopping centres
Increased Grocers and Infrastructure – AFM01 has increased exposure to more resilient income providers such as Consumer Staples (supermarkets) and infrastructure assets which have less exposure to tenants with cyclical earnings, but rather, more reliable ones like grocers and bottle shops.
In saying that, Unibail-Radamco (Westfield) and other similar property trusts are still languishing near their lows. While they are some of the most hated shares on the ASX, there are a few hurdles which need to be cleared before investors get behind these companies.
2. Earnings Certainty
Distributions (dividends) have been paid.
At the peak of CV19 in late March, we checked with AFM01 and some underlying property managers to see how certain their income was. There was very little certainty at the time, however today, most have confirmed thorough payments of distributions late last month.
In late March, most property managers were not publicly confirming their earnings, but rather actively removing earnings guidance. This was to reduce the risk of being sued on the very off-chance that they were wrong.
At that time we had incorrect information flowing through. We know of some companies within the Wesfarmers (WES) brands that were effectively crying poor during CV19 and asking for rent reductions from their landlords – only to find out from WES that the retailer-tenant’s profits were up +30% from the year before. This kind of misinformation make it difficult for property trust managers to maintain guidance.
Today, the information is flowing through and most property trusts have paid out distributions, reaffirming investors that rent collecting is a resilient income stream.
The payments of these distributions is around half of what enables AFM01 to pay out the income to us as investors.
Points to note are:
Unlike shares, property trusts cannot hold onto their profits for a rainy day or tough times ahead. Property trusts must pay out their income each year. All trusts we look at have paid out distributions except for Sydney Airports (SYD) and GPT Group (GPT).
3. Confidence Ahead
No one has certainty in markets, and definitely not in the CV19 era. However, most of the holdings within AFM01 have the highest level of certainty within the property sector; where possible.
Any questions facing these holdings within the portfolio are with minor hurdles and low weighting (exposure) within the portfolio.
While we cannot guarantee returns, the income streams are as reliable as AFM01 can get on the ASX.
Additionally, the increased volatility on the ASX has been beneficial to the portfolio’s options income.
Without getting too technical:
When volatility and uncertainty are high, people pay more for the ability to be in the share market, without buying shares (through options)
AFM01 sells options to these types of investors, this is how AFM01 pays such a high dividends (7%pa)
Because of the CV19 volatility, AFM01 has been getting very good incomes from selling these options
AFM01 unit holders have benefited from this higher volatility