Originally appeared in Ausbiz.
Matthew Strotton, RAM Executive Director and Head of Real Estate, joins Ausbiz for an insightful interview to discuss the current landscape of A-REITs. He highlights the resilience of the RAM Essential Services Property Fund (ASX:REP), supported by its healthcare and essential retail assets, which has allowed it to achieve strong leasing results over the last two years.
As optimism about interest rates stabilising sets in, investors continue to evaluate the real estate market’s stabilisation point, which will lead to increasing confidence in underlying valuations. Matthew points out, “We are at a distinct point where the market is analysing real estate valuations more broadly. As confidence re-emerges—fueled by the belief that interest rates have peaked and we are entering a normalisation cycle—we anticipate an increased demand for our portfolio.”
Full transcript:
Ausbiz:
Good afternoon. You’re watching The Plot right here on Ausbiz. Thank you very much for joining us this afternoon. Now, 2023 was a challenging year for Australian REITs. Last year, however, there appears to be a glimmer of hope on the horizon, with interest rates potentially stabilising or decreasing. Well, Real Asset Management remains optimistic about the future of healthcare and essential retail real estate. Matthew Strotton from RAM REIT joins us now. Matthew, thank you very much for joining us. Look, how has 2024 been, given the kind of year you had last year?
Matthew:
Yes, as you mentioned, it has been challenging. We’ve been working through elements of disbelief, especially in terms of where interest rates have gone and how inflation has permeated through the economy. We are seeing, as you’re suggesting, signs of optimism that the interest rate cycle has run its course. I, too, sense, like the Reserve Bank, that inflation has also peaked. There are still some signals that need to be deciphered, but we are optimistic in our outlook for both our healthcare and essential services retail sectors moving forward.
Ausbiz:
Yes. We’re looking specifically at the RAM Essential Services Property Fund that you manage. And I understand that the underlying assets there are based on non-discretionary retail and healthcare assets. Is it purely because these sectors have defensive aspects to them that you are optimistic? What’s the trend like?
Matthew:
Operationally, yes, our exposure to both the healthcare industry and essential services retail, which includes supermarket-based schemes situated in our local communities and typically housing services and retail offerings that are part of daily and weekly visitation, has shown resilience. These sectors have been quite resilient from an operational perspective, with strong leasing results over the last two years. We’ve seen very strong leasing tension with good leasing spreads on new deals and renewals, both at an operational level and at a capital markets level. And, as you just showed on the chart, our industry, along with many other REITs, has withstood quite a bit of pressure as interest rates rose rapidly.
This pressure has spotlighted the real estate sector, with investors trying to gauge an appropriate pricing point for the stabilisation of capitalisation rates. This means more volatility and a bit of uncertainty regarding where capitalisation rates and valuations will settle. However, with recent signals, like the stabilisation of interest rates and the announcement by the RBA, we expect to see this uncertainty start to subside and confidence reemerge. We hope that this will translate into a resurgence of optimism and confidence in buying intentions, reflecting positively on share prices in the short term.
Ausbiz:
I want to delve deeper into the conversation on valuations, but first, I was looking at your website. If this is up to date, you have 32 properties with a current portfolio valuation of 749.9 million, and an occupancy rate of 98%. Those are the numbers we’re seeing now. But, as I said, I want to talk more about valuation. Before we do that, other fund analysts have been looking at your fund, and this is what David Lane from Ord Minnett had to say back in November 2023. Let’s take a listen.
(Replay) David Lane:
They’re very good managers. The fund has exposure to both medical and essential services. So, effectively, your chemists and your grocery stores, catering to your day-to-day needs, offer a fairly defensive sort of exposure. They’re trading at about a 32% discount to NTA, and based on the fact that they’re trading at such a discount to NTA and that they’ve got an eight and a half percent distribution yield, we’re forecasting a total return of about 22% over the next 12 months. So we’ve got a buy recommendation on them with a target price of $0.75.
Ausbiz:
So just to update that, that was last year. Ord Minnett now has a buy recommendation on RAM at $0.74. Still, it was a positive evaluation of this fund. So, what’s your reaction to David Lane’s statement, and from a valuation perspective, when do you think you’ll see that valuation normalise in 2024?
Matthew:
That’s a great piece of commentary from the Ord team, and it aligns quite consistently with our views. At the highest level, the market has experienced nervousness about where pricing might land, and we’ve all witnessed movements in capitalisation rates across sectors, including office, retail, healthcare, and essential services retail. However, I will note that our sector has experienced a relatively stable level of movement. There is a high level of demand for purchases looking to acquire assets within our category. We disposed of three assets last year that were at or above book value, proving that our underlying valuations and the portfolio’s valuation adjustments align with market expectations.
Looking forward, we are at a distinct point where the market is analysing real estate valuations more broadly. As confidence reemerges—fueled by the belief that interest rates have peaked and we are entering a normalisation cycle—we anticipate increased demand for our portfolio. David is right; with an 8.5% current distribution yield and a projected NTA in the mid-70s, the outlook makes a lot of sense from our perspective. However, much depends on our continued work and our ability to deliver on our promises quarter by quarter.
Ausbiz:
And regarding that confidence in your appetite for acquisitions, as you mentioned earlier, is it primarily rooted in the calming interest rate environment, or are there also demographic and demand-supply considerations that you believe will drive the property market and your sector?
Matthew:
That’s an excellent question. There are a couple of reasons for our strategy. We’ve observed signals that have bolstered our confidence in pursuing a more extensive range of divestments and our divestment program, which might be more substantive than investors anticipated. Our reasons for engaging in this program stem from our intent to recycle some assets. Specifically, those at the periphery of our portfolio that have completed their investment lifecycle, allowing us to capitalise on relative value elsewhere. The assets we aim to acquire are expected to introduce relative value compared to those we’re divesting, while also aiming to enhance the sustainability of our portfolio’s income by acquiring assets with longer yield horizons and stronger tenant covenants.
Additionally, we’re taking this opportunity to dynamically manage our leverage, targeting a reduction towards the lower 30% range as part of the divestment strategy. Investors have expressed strong interest in this approach.
Ausbiz:
All right, thank you very much, Matthew Strotton. Your insights today offer a compelling perspective on how the landscape for REITs might evolve this year.
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