REP: Where Resilience Meets Opportunity  |  Ausbiz Essential Alternatives Investor Event

In a recent interview at the Ausbiz Essential Alternatives Investor Event, Matthew Strotton, our Executive Director and Head of Real Estate, shared valuable insights into the strategy and performance of the RAM Essential Services Property Fund (ASX:REP).

Resilience Shining Through Essential Services

REP has consistently delivered strong performance, meeting or exceeding guidance despite the obvious headwinds facing the REIT sector over the past two years. This success underscores the strength of RAM’s active capital management, its ability to make “tough” decisions with its strategic focus on essential services. The fund comprises 31 high-quality assets across Australia, focusing on healthcare properties anchored by hospitals and allied health services, as well as essential retail neighbourhood centres featuring supermarkets and non-discretionary services.

This strategy has positioned REP to provide stable and consistent income to investors, even amid challenging market conditions, such as the post-COVID-19 environment and a volatile inflationary period. As Matthew noted, “We’ve had very high levels of rent collections with very low levels of arrears and, importantly, some very strong leasing results since launch, but especially over the last 12 months.”

He added, “As we renew and re-sign our tenancies, we’ve been achieving strong rental uplifts, which is a testament to an essential services tenancy mix. Both healthcare and retail have been resilient through these periods of time.”

Active Management Sets REP Apart

Matthew emphasised that the key to REP’s success is active management, a unique feature of the fund compared to other A-REITs. REP intends to move from a defensive development stance in the coming quarters as conditions improve. The election to defer development risk early in the cycle has been a vital component to managing outcomes during this volatile period. REP is a core to core-plus vehicle, which means that REP may activate value-add opportunities to enhance returns from its low-volatility income yield, from time to time. “We will consider value-add opportunities by taking on calculated near term leasing risk, as well as what pursuing development projects or organic value-add,” Matthew explained. “We might not specifically pursue properties that present us with ground-up development or full repurposing risk, but we will seek to add value by building on our existing properties and activating surrounding land.”

A key component of the Manager’s active management approach has been REP’s capital recycling strategy. Matthew noted that RAM has been selling assets early in the cycle that have fulfilled their strategic purpose in order to manage portfolio leverage and to reinvest into assets that are in their early stage lifecycle, particularly in healthcare. This shift reflects RAM’s long-term plan to strengthen portfolio resilience and growth while continuing to deliver reliable and consistent income to investors.

A Strategic Shift to Healthcare Focus Supported by Investors

“In consultation with our investors and our Board, we’re working towards a greater concentration in healthcare,” Matthew continued, noting that the shift is driven by both market opportunities and strong investor support.

Matthew shared that this strategic move is expected to provide significant benefits to investors, while the overwhelming support from investors underscores the positive direction in which REP is heading. “This is going to produce some favourable outcomes for investors, including a far longer WALE for the portfolio, which means lower volatility and higher levels of reliable income,” he said.

Why Now is a Good Time to Invest in REP

As inflation normalises and interest rates stabilise, the outlook for A-REITs like REP becomes increasingly attractive. With its focus on income stability, increased healthcare exposure, and active portfolio management, REP is well-positioned to deliver stable returns and long-term growth for investors.

Reflecting on the challenges and opportunities ahead, Matthew shared, “I was describing to an investor recently, that this cycle has resulted in levels of volatility that compare with the GFC. To experience this sort of upheaval in interest rates led by inflation causes you to make tougher decisions. We have to ensure we are buckling down and directing our resources to the right areas, ensuring the team focuses on those initiatives that impact the portfolio and result in better investor outcomes.”

He continued, “I’m very pleased with where REP is positioned today. As we continue to recycle capital and reposition the portfolio, our shift to focus more on healthcare is a strong move forward. It will provide investors with greater clarity in our strategy and enables a clearer underlying valuations. We’ve received overwhelming support to take this direction, so it’s exciting times ahead for REP.”

For more details on RAM’s strategy and performance, watch the full interview on Ausbiz or read the transcript below.

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Interview Transcript:

Nadine Blayney:                                                                                                                                       

Let’s talk about commercial property, shall we? What type and why now?

Now, the fund we’ll discuss is listed because, of course, there are alternative ways, as we’ve just learned, to access alternative asset classes. It’s run by the team at Real Asset Management, for which I ask Matthew Strotton, Head of Real Estate, for an introduction.

Matthew Strotton:

Yeah, absolutely. And it’s a pleasure to be here. Real Asset Management is a private group that’s been around for 10 years or so that focuses on alternative space. Quite a lion’s share of our focus is in Real Estate, but we also look at Private Equity as well as solutions in the Credit space. In late 2021, the group listed its first real estate investment trust (REIT) on the Stock Exchange. The RAM Essential Services Property Fund (ASX:REP), which is much of my time and our team’s energy goes into that. And that’s a portfolio that’s focused on both healthcare assets and essential services retail assets.

Nadine Blayney:

OK, so REP, I believe is a ticker code for the RAM Essential Services Property Fund. Could you flesh that out a bit? So, 42 properties across Australia, talk to us about the quality of these properties and, where they’re located, just a bit more detail.

Matthew Strotton:

We have 42 assets across the entire platform, there are 31 assets in the listed vehicle. And we’ve been striving to focus around half of our exposure in healthcare and half in retail. Now the healthcare component is primarily hospitals, both day hospitals as well as full service overnight hospitals, and a range of other allied healthcare, and secondary healthcare across the country.
Our assets range in size and that’s been quite a positive feature of the portfolio as we’ve looked to recycle some capital over the last two to three quarters. The retail assets are typically those properties that we all visit at least once a week, that contain a supermarket as well as other non-discretionary items, like visiting your butcher, your baker and have been a very, very important part of the portfolio and have serviced quite well.

Nadine Blayney:

OK, so I would imagine you’re targeting capital gains as well as income?

Matthew Strotton:

It’s quite a lower risk vehicle, so I would suggest that we are deriving most of our total return from income. We will consider value-add opportunities by taking on calculated near term leasing risk, as well as what pursuing development projects or organic value-add. We might not specifically pursue properties that present us with ground-up development or full repurposing risk, but we will seek to add value by building on our existing properties and activating surrounding land. Relatively low order developments, but yes, I would describe it as certainly more of a core or a core-plus vehicle where returns are derived from low volatility income.

Nadine Blayney:

OK. We’re just off the back of reporting season. This is unique in this event, in that this is a publicly listed opportunity. So how did you go on results?

Matthew Strotton:

Yeah, it was a great results period for us. It’s been a challenging two to two and a half years for real estate vehicles. I’m delighted that we’ve gotten through each quarter since listing in 2021, at our exceeding guidance. It’s been quite a result for us. That doesn’t mean it hasn’t been challenging at times. We’ve been quite pleased with the relative health of the tenants in our portfolio, when you consider going through the back end of Covid. As well as what is quite a volatile inflationary period and certain sort of edges of our economic weakness reaching into the economy.

When you have a mix of healthcare, and as we described as essential services retail, our tenants have been quite resilient. We’ve had very high levels of rent collections with very low levels of arrears and, importantly, some very strong leasing results since launch, but especially over the last 12 months. As we renew and re-sign our tenancies, we’ve been achieving strong rental uplifts, which is a testament to an essential services tenancy mix. Both healthcare and retail have been resilient through these periods of time.

Nadine Blayney:

So that’s a unique feature as compared to some A-REITs, because it has been a troubled space. You know we don’t have time to get into all of the reasons why, you listed a couple of them prior, but we are even though inflation is proving stickier than perhaps we’d like it to, we are going to be moving into a lower interest rate environment, so just talk us through what that potentially means going forward.

Matthew Strotton:

Yeah, most if not all REITs do rely on using leverage to a degree. I would describe our REIT sector as being relatively conservative, but when you have such a volatile period of inflation, which has directly impacted on that interest rate burden on our P&L’s, when that happens so quickly, it invariably can surprise operators. Most operators will see this in advance and attempt to further de-risk by reconstructing the hedging profile, as well as sort of looking towards the future on and managing any risks or leasing or expiry profile so to manage cash. So that it has been a challenging time, I’m delighted to say, again, as you say, notwithstanding inflation, staying sticky for a little bit longer that we have reached the peak of the rates cycle.  Forward yield curves would suggest that has indeed been the case, and we’re not underwriting any sort of significant interest rate declines internally, and I believe most of our peers are doing the same.

I believe if we stayed at around this level for a period of time that that will be a very positive outcome for REITs, and if beyond say the next 6 to 9 or 12 months, we do start to see inflation start to normalise and that flowing through to interest rates, you will see quite an attractive period of time for the outlook in total returns for the REITs industry.

Nadine Blayney:

OK. Maybe we’ll just get into now just a little bit more detail into REP and what sets it apart from other A-REITs, because that’s what we’re looking for differentiation here in this Essential Alternatives event. We’ve got a slide, I think that you talked about, pretty long WALE, nearing 7 years. Just walk us through some of the detail please.

Matthew Strotton:

So the WALE, as you say, the weighted average lease expiry. So that’s the average contracted rental income that is coming into the portfolio across or an average across the portfolio is approaching 7 years for our vehicle. That’s relatively strong and that’s largely symptomatic of healthcare leases, which are typically on far longer duration than what I would describe our retail tenancies. Having said that, our supermarkets, Woolworths, Coles and ALDI, they will invariably agree to 10 or 15 year terms, so that does contribute to the lower volatility nature of the income.
The other areas that I would call out within our vehicle, I mean essential services that really does describe the direction of the vehicle, the low volatility nature of our sectors, the defensiveness and resilience of our sectors has really shone through this period of time, and in fact in this particular quarter, we’ve actually elected as a group and in consultation with our investors and our board, to build a greater concentration in the near term towards the healthcare sector.

It’s not saying we don’t like the retail sector. I think just as our outlook internally, and this is going to produce some quite favorable outcomes for investors, including what more than likely will be a far longer WALE for the portfolio, which means lower volatility and higher levels of reliable income going forward. It’s been quite a moment for our vehicle. We’re still going through engagement and consultation with our investors, but there is significant support for us to make that move.

Nadine Blayney:

Interesting. So that’s a strategic shift that will continue presumably throughout this financial year. If you do work with investors and find that this is the direction you’d like to take the listed vehicle in, what needs to happen then? Do you sell off some of the assets in the retail space to acquire more in that essential services healthcare space.

Matthew Strotton:

Yeah, we’ve been on for two fairly distinct capital recycling plans. One has been to recycle assets out of the portfolio that have run through their strategic life. So they have invariably delivered upon our investment plan and the outlook for those assets is less favorable compared to assets that we believe we can acquire, should we reallocate that capital. So in consultation with our Board and as we’ve updated our investors over the last two or three quarters, we’ve been actively selling down some of those assets and building our available capital, in order to pursue more attractive acquisitions.
Now whilst we’ve been doing that, that has allowed us to get further engaged with the market, build a greater level of understanding of the opportunities available in healthcare. And at this point in the cycle, we are quite drawn to pursuing more healthcare. We see relative value at the moment, and we see that being around for an extended period of time.

And as we’ve indicated to our investors, what that means in the second phase of recycling is, we will be looking at solutions to sell down a proportion of the retail portfolio, that might mean outright sales, that might mean partial sales, but reducing their average over the overall exposure to retail, whilst in parallel we pursue attractive opportunities in the healthcare space and we’re quite excited by what we’re seeing today and are pursuing quite a range of opportunities to conduct that second phase of recycling. So you’ll see the portfolio mix start to evolve over the next 12 to 24 months.

Nadine Blayney:

Well, it sounds like you have your work cut out for you, but exciting times. I suppose when you take the macro into consideration as well?

Matthew Strotton:

Yes, indeed. I was describing to an investor recently, that this cycle has resulted in levels of volatility that compare with the GFC. To experience this sort of upheaval in interest rates led by inflation causes you to make tougher decisions. We have to ensure we are buckling down and directing our resources to the right areas, ensuring the team focuses on those initiatives that impact the portfolio and result in better investor outcomes.
I’m very pleased with where REP is positioned today. As we continue to recycle capital and reposition the portfolio, our shift to focus more on healthcare is a strong move forward. It will provide investors with greater clarity in our strategy and enables a clearer underlying valuations. And as I said, we’ve received overwhelming support for us to move in this direction, so it’s going to be exciting times ahead for REP.