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Fund Manager Due Diligence: Reitway Global
Contents
Page
1. Alpha Thesis
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2. Investment Philosophy
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3. Investment Process
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4. Business Overview
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1.
Alpha Thesis
Benchmark indices are constructed by factors that are not related to asset fundamentals or valuation, which leads to a mispricing of assets (“allocative inefficiency”) on an individual, sectorial or geographical basis.
Reitway Global (“Reitway”) capitalizes on this mispricing by managing funds on a benchmark agnostic basis by taking investment positions beyond the components of conventional indices. This allows us to
gain exposure to the many real estate securities1, some of which are often overlooked by mainstream
analysts or are not included in traditional global property indices.
The performance advantage presented by our alpha thesis is unlikely to be eroded over time, because it is tied to perennial biases inherent in index construction and human behaviour. Furthermore, the growing popularity of index funds will undoubtedly lead to a further deterioration in the efficient price discovery of markets.
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Investment Philosophy
The Reitway Global Property funds are managed on a benchmark agnostic basis which is typically expressed by taking positions beyond the components of conventional indices.
Our investment philosophy and process differs from a benchmark centric approach where the benchmark has a significant influence on security selection and portfolio construction. Our portfolio therefore exhibits an active share in excess of 90% due to positions and position sizes that differ substantially from Global REIT indices. This philosophy is supported by the research paper How active is your manager2, which found
that an active share of 80% to 100% is essential in generating excess returns.
A cursory comparison of our top 10 holdings versus our peers and benchmark proves the uniqueness of our investment offering for the South African market.
1 The terms real estate securities and Real Estate Investment Trusts (REITs) are used interchangeably in this
document.
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Reitway Top 10 Direct REIT holdings* versus benchmark and peers
No. Benchmark Peer 1 Peer 2 Reitway Global
1 Simon Property Group Simon Property Group Simon Property Group Safestore Holdings
2 Public Storage Public Storage Equity Residential American Capital Realty
3 Equity Residential ProLogis Inc AvalonBay Alexandria Real Estate
4 Health Care REIT Unibail-Rodamco ProLogis Inc CyrusOne Inc
5 Unibail-Rodamco SA Boston Properties Public Storage Crombie REIT
6 Ventas Inc Equity Residential Health Care REIT Boston Properties
7 AvalonBay Vornado Realty Nippon Building Fund Allied Properties
8 ProLogis Inc AvalonBay Unibail Rodamco SA Sovran Self Storage
9 Boston Properties Scentre Group Boston Properties Deutsche Wohnen
10 Vornado Realty Essex Property Trust Scentre Group CubeSmart
Benchmark: GPR 250 Global REIT Index. Source: Global Property Research, peer fund fact sheets. Date: 31 Mar 2015 *Direct REIT holdings calculated on a see-through basis. Peer 1: STANLIB; Peer 2: Catalyst
Rolling 1-year alpha: Reitway* versus ASISA Global Real Estate Peers
Source: Reitway Global, Thomson Reuters Datastream, Morningstar. Date: 31/09/2009 to 31/03/2015. Performance denominated in US dollar and include distributions. Simple average off all 6 current funds in ASISA Global Real Estate Category. *From 31 July 2009 to 31 January 2012 the fund was named Grindrod Global Property Income Fund; from 1 February 2012 to 30 June 2014 the fund was named MET Global Property Fund; since 1 July 2014 the fund is named Reitway BCI Global Property Fund. Same mandate across all name changes.
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3.
Investment Process
Our process enables us to focus on selecting the most promising investment opportunities in the Global Real Estate universe. Stock selection is combined with sound portfolio management techniques in order to construct a portfolio with the highest probability of delivering alpha to investors.
3.1 Primary Research
Our idea generation process differs from that of the typical global fund manager who uses screening tools to uncover potential investment ideas. At Reitway we generate investment opportunities through the services of specialists Real Estate analysts in the various geographies. These analysts effectively act as agents to Reitway and it’s their task to provide our investment team with the best alpha opportunities in their coverage universe.
5 Current research partners:
As at 31 March 2015. REIT valuation
Research partners are responsible for primary valuations of REIT securities and may use a number of valuation methods. The following models are generally used to determine the fair value of a REIT:
Net Asset Value (NAV) models
Discounted Cash Flow models
Relative multiples
NAV estimates are particularly relevant to REITs. The value of a REIT is foremost a function of the value of its assets and the future earnings generating power of those assets.
To set price targets, analysts typically start with NAV and assign premiums/discount percentages that reflect management’s propensity to add value, balance sheet strength, and same property net operating income (SSNOI) growth for each company as well as each sub-sector.
The quality of research received from our research partners are continuously evaluated according to the following criteria:
Track-record: Analysts must have a proven track-record of spotting excellent investment opportunities.
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Objectivity: Analysts must show the ability in any context to judge fairly, without bias or external influence.
Clearly-defined assumptions: Analysts should clarify the assumptions used in analysis, forecasts and valuation models.
Consistency: Analyst assumptions should remain consistent in method and application. Fact vs. opinions: Analysts should make a clear distinction between facts and opinions. Disclosure: All potential conflicts of interest faced by analyst or their firms must be disclosed.
3.2 Secondary research
Secondary research is conducted by the Reitway investment team to formulate a deeper understanding of the investment case for a specific security. Secondary research include:
Analyst and management conference calls
Critical assessment of valuation models
Supplementary financial and industry analysis
Property tours and conferences
As part of secondary research, the Reitway investment team makes a diligent effort to determine whether valuations are credible. When assessing an analyst’s valuation of a specific REIT, the following factors are taken into account by Reitway:
Are the key inputs (projections, discount rates, growth rates etc.) realistic?
Are the analyst’s assumptions applied consistently and have they been stress tested?
Does the analyst provide clarity about the time frame, potential catalysts and uncertainty with regards to the reaching of target prices?
The critical assessment of valuation models will ultimately help to minimize unexpected downside risk to the portfolio. Furthermore, it is consistent with Reitway’s policy about the timely and consistent review of approved research providers to ensure that the quality of research continues to meet the necessary standards.
The outcome of our secondary research is a detailed investment case, which is presented and discussed at bi-annual portfolio meetings.
3.3 Stock Selection
The investment case for a prospective security is based on the investment team’s assessment of the following fundamental factors:
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Quality
Prospects
Valuation
Our stock selection process is not based on a preference for a specific investment style (value vs. growth) and therefore a specific factor is not favoured over another.
An initial total return of 15% is required for a REIT to be considered as investment. In addition, conviction is required on at least two of the abovementioned factors (Quality, Prospects, Valuation) for a REIT to be included in the Buy list. The rationale behind this risk management tool is to avoid “value traps”, where significantly undervalued securities keeps destroying shareholder value over time. Our process would therefore require justification of a company’s Quality in order for the case to be made that an undervalued security will ultimately rerate to normalised levels.
Buy and Watch Lists
The Buy List consists of REIT investment ideas that will be included in the master portfolio as part of the direct REIT strategy. The Watch List consists of candidates for inclusion in the portfolio upon further research and/or future upward valuation.
3.4 Portfolio Construction
The master portfolio is constructed using two complementary investment vehicles: Direct real estate securities as included in our Buy list (typically 20-30 positions).
A portfolio of real estate Closed-End Funds that enhances the yield, diversification and risk-adjusted returns of our total portfolio.
By including Closed-End Funds in our portfolio, we seek to combine our stock picks into a portfolio that also reflects broader market and portfolio-level considerations.
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Closed-End Funds combine broader market exposure with our benchmark-agnostic stock selections:
Benefits of using Closed-End Funds (CEFs) in our portfolio:
Benefit Description
Yield enhancement CEFs generally trade at a discount to their stated Net Asset Values (NAV), resulting in higher distribution yields.
Market Beta CEFs provide diversified exposure to well-researched global REITs.
Market anomalies Opportunities exist to exploit anomalies in the market by investing in CEFs that are trading below their historic average discount-to-NAV and have tended to revert to this mean over time.
The portion of the portfolio allocated to CEFs have varied over time between 20% and 50% and is typically influenced by the desire to enhance overall portfolio yield. In the example below a target portfolio yield of 5% would be achieved by a 67% / 33% split between Direct REITs and Closed-End Funds:
Investment vehicle Weight Distribution Yield Yield Contribution
Direct REIT securities 67% 3.7% 2.22%
Closed-End Fund securities 33% 6.3% 2.80%
Total portfolio 100% 5.02%
The following sections discuss various overlays that are used as support tools in producing the final portfolio:
9 3.4.1 Tactical Asset Allocation
Broad-based market expectations are formulated in order to determine the relative attractiveness of the various global REIT markets. The portfolio is then weighted towards the markets that present the best investment opportunities.
3.4.2 Currency Management
Movement in the value of currencies can have a pronounced impact on a global investor’s returns, hence managing currency risk is an important part of portfolio construction.
Reitway manages currency risk by constructing a currency-adjusted portfolio that takes into account expected currency movements relative to our reporting currency, the US dollar. Here our primary focus is to avoid currencies that have the potential to fall significantly and erode local currency returns.
The main input into Reitway’s tactical currency overlay is research provided by Bank Credit Analyst (BCA). BCA combines propriety models and macroeconomic themes in order to determine the underlying forces that impact currency trends globally. BCA’s service is backed-up with internal analysis by our investment team in order to finalise currency views.
This process is best described by the following example:
3.4.3 Interest rate sensitivity
Reitway classifies REITs as either Equity-REITs or Bond-REITs, based on their sensitivity to interest rate changes (duration). This affords the portfolio management team the opportunity to direct Portfolio exposure towards those REITs that are expected to outperform in an anticipated interest rate environment.
Equity-REITs are more positively correlated with interest rates compared to the overall REIT market. These REITs typically have shorter lease durations and are therefore able to increase rental rates quickly as
Example 1: Currency management
The Reitway investment team had a bullish view on Japanese REITs (J-REITs) early in 2013. This view was based on a number of fundamental factors specific to Japanese monetary policy and its REIT market. According to our expectations, J-REITs could rerate by approximately 20% p.a. over the next 36 months. However, the Bank of Japan explicitly targets a weak currency in order to engineer a turnaround in its long
suffering economy. Accordingly, the Yen is expected to depreciate by 15% against the USD over the next 3 years.
In terms of our currency adjustment approach, we will not take a position in J-REITs based on its expected USD-return of ~5% p.a., as it does not satisfy our target return of 15% p.a.
The following chart depicts modest J-REIT returns in USD-terms, due to a significant weakening of the Yen against the USD. 12.66% p.a. 32.67% p.a. 90 110 130 150 170 190
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14
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economic conditions improve (rising interest rate environment). Typical examples of Equity-REITs are Hotel and Self-storage operators.
Bond-REITs have long-term lease durations which are negatively correlated to interest rate changes. In a rising rate environment the present value of their long-term assets will be worth less. Typical examples of Bond-REITs are Healthcare and Net Lease operators.
In order to classify a REIT as an Equity-REIT or Bond-REIT, Reitway calculates the correlation of the REIT’s share price and its domestic 10-year bond yield over the latest 5 year period. This correlation is then compared to the overall REIT market to determine the REITs relative sensitivity to interest rate changes.
3.4.4 Risk Management
In addition to the fundamental risks that are evaluated as part of our research process, we assign risk-reward ratings (based on the Sortino-ratio) to each security in our portfolio. These ratings act as a base for determining security sizes in the portfolio.
The following constraints are applied to the weightings of a security in the master portfolio:
Maximum holding of 10% per REIT.
% of securities with weights greater than 5% may not exceed 40% of the total portfolio.
3.4.5 Final Portfolio
Individual security weights in the master portfolio are based on the risk-reward ratios determined in 3.4.4. These weights are then modified to reflect the experience and judgement of our investment team. The end result is a portfolio that best reflects our stock selection skill and sound portfolio management theory.
3.5 Portfolio Execution 3.5.1 Sell discipline
Our sell discipline is based on the opportunity cost of holding a current asset.
The opportunity cost of holding or staying invested in a current holding is determined upon uncovering another REIT that we see as offering a superior investment outcome. If the opportunity cost is positive, the current holding is sold or decreased in order to include the new investment. This sell discipline translates into the most desirable REITs being included in our portfolio.
11 3.5.2 Trading
Technical indicators and financial news releases are used to develop a trading strategy on days that securities are traded. The trading strategy assists in determining market sentiment and possible short-term price moves.
Limit orders (which provides price certainty) are generally used when trades are executed. The objective is to improve on the market bid or the market ask. This type of order is best suited to passive and value-motivated trading situations.
We constantly monitor the market on trading days and we adjust our limit prices throughout the trading session in order to negate execution uncertainty concerns. Market orders may be used from time to time if this order type is warranted by liquidity constraints or low market volumes.
3.5.3 Cash flow management
Our focus on active management and the breadth of the different REIT markets presents the opportunity to remain fully invested at all times. Therefore, cash inflows are invested immediately in order to minimize cash drag.
Example 2: Sell discipline in practice
On 1 January 2013 we purchased REIT X for $30.00, while we estimated its fair value to be $36.00. Including its dividend yield of 5% we expected the REIT to produce a total return of 25%.
On 1 January 2014 we uncover REIT Y with an expected return of 25%, while REIT X was trading at $35.00 and offering only 8% upside (incl. distributions).
After studying REIT Y’s investment case we concluded that there is a positive opportunity cost of holding REIT X and not invest in REIT Y.
Under this simplified scenario REIT X will be sold for a profit and the proceeds will be used to invest in REIT Y.
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4.
Business overview
Reitway Global is an investment manager dedicated to Global Listed Property Funds, managed according to a benchmark-agnostic investment philosophy. The company was established in July 2012 by Greg Rawlins to provide high-performance global property portfolios to clients in multiple investment domiciles.
4.1 Products
Reitway offers Global Property portfolios in various jurisdictions by leveraging of a single investment philosophy and process, whereby the same master portfolio is replicated across the different investment domiciles. This affords investors the benefit of selecting an investment location and jurisdiction that suites their needs.
4.2 People
Reitway currently has a total of 6 full-time employees, with 5 full-time investment team members.
Name Position Date joined Industry
experience Qualifications
Greg Rawlins CEO & CIO July 2012 15+ years B.Com, Dip. Acc., CA (SA) Wim Prinsloo Portfolio Manager October 2013 5+ years B.Com (Hons), CFA Grant Lowton Portfolio Manager October 2014 7+ years B.Bus.Sci (Hons), CFA Martin Botha Assistant Port. Manager January 2013 2+ years B.Com (Hons) Laurene van Coller Assistant Port. Manager January 2014 4+ years B.Acc , LLB Nikki Visser Operations Manager January 2015 9+ years B.Bus.Admin
Master Global Property Portfolio
(Single philosophy and process)
South Africa
Fund: Reitway BCI Global Property
Inception: 31 Jan 2012
Size: R 1.14 billion
Malta
Fund: Reitway Global Property
Inception: 17 Dec 2012
Size: $22.2 million
Australia
Fund: Reitway Global Property
Inception: 1 Aug 2014
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Below is a brief summary of the key investment decision-makers:
Greg Rawlins, CIO & CEO
Greg Rawlins qualified as a CA (SA) at Deloitte’s in 1984, before leaving the profession to pursue several entrepreneurial and investment enterprises. Over the past 15 years, his focus has shifted increasingly to commercial property, ultimately leading to a full convergence into this sector. Greg’s property experience includes the direct ownership and management of properties as well as the creation of a substantial portfolio of listed South African property equities.
Over the past twelve years, Greg has focused on foreign listed property vehicles, accumulating considerable knowledge on a range of subjects, including withholding tax, fund raising and Real Estate Investment Trusts (REITs).
Greg Rawlins holds executive responsibility for Reitway’s operational and investment functions.
Wim Prinsloo, CFA - Portfolio Manager
Wim Prinsloo contributes to the management of Reitway’s Global Property Funds, with a specific focus on UK, Europe and Asian listed property shares. His main duties include investment analysis, portfolio management and client communication.
Wim started his career in 2009 at Liberty Group and joined Quantum Asset Management in 2011 as an Analyst and Assistant Portfolio Manager. He was admitted as a CFA charterholder in 2013.
Years at Reitway Global: 1 year, 7 months
Grant Lowton, CFA - Portfolio Manager
Grant Lowton contributes to the management of Reitway’s Global Property Funds, with a specific focus on US, Canada and Australian listed property shares.
Grant started his career in the financial markets as an equity analyst at Kagiso Securities Limited and later joined KSL Online as private client trader. After working as a trader he embarked upon a role as an equities portfolio manager at Vunani Private Clients. Grant earned his CFA charter in October 2013 and joined Reitway in the same month.
Years at Reitway Global: 7 months
4.3 Employee remuneration & incentives
Investment team members receive fixed salaries and annual performance-based bonuses, which are based on the performance of the funds relative to the benchmark during each annual period.
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An employee profit sharing scheme is currently under development and will take effect when the company reaches R2 billion in AUM.
4.4 Shareholder structure
The company is currently 100% owned by The Panthera Trust, with Greg Rawlins as the sole beneficiary. The aim is to attract value-adding external shareholders once the company has matured from its current fledgling phase.
4.5 Regulatory bodies and ethical responsibilities Reitway is answerable to the following regulatory bodies:
South African Financial Services Board
Malta Financial Services Authority
Australian Financial Services
Investment personnel are either CFA Charter holders or candidates and are bound by CFA Institute's Code of Ethics and Standards of Professional Conduct.