The main message I wanted to give you at the end of 2019 was simply ‘thanks.’
We have had a great year and I hope you have as well. While each year has its challenges, I wanted to take the opportunity to say thanks for being part of a successful 2019 for APN and we certainly hope that you’re equally pleased with the results whether you are a shareholder or an investor. We greatly appreciate your support and we are looking forward to working with you in the new year.
As a small gift of sorts, I thought we’d share a few things we’ve come across over the year which we thought were insightful and relevant for the business of investing.
I also can’t help resist saying something brief about the volumes upon volume of ‘stuff’ which is written these days – there is some gold amongst the piles of words produced however a large percentage is complete bulldust. Inconsequential at best, dangerous at worst and best ignored. In some ways a large part of what we all need to do is figure out which category what we read fits into.
Nassim Nicholas Taleb (former options trader, current author, flaneur, philosopher in real world risk, weightlifter (deadlifting)) on investing with asymmetry ‘Skin in the Game’:
“If you do not take risks for your opinion, you are nothing. Courage (risk taking) is the highest virtue. We need entrepreneurs. Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions. Skin in the game…reduces the effects of the divergence between action and cheap talk…Skin the game keeps human hubris in check… Things designed by people without skin in the game tend to grow in complication (before their final collapse) … non-skin-in-the-game people don’t get simplicity.” – Skin in the Game: Hidden Asymmetries in Daily Life, Nassim Nicholas Taleb, 2018
Alignment is important and we are seeking to employ the principle of ‘skin in the game’ in the way we undertake our business – we put our money where our mouth is. It’s part of our commitment to excellent governance and to date it has served us well.
APN is owned about 35% by its board and management team and in turn APN has approximately $127 million of its own capital invested in our funds alongside our investors. We believe we are in it together with our investors and our objective is to generate exceptional investment results for which we are paid fairly for delivering and in which we participate through our co-investment. As an extension of this – simplicity is something we are always striving for. The KISS principle is a highly valued one at APN (‘keeping it simple’).
Howard Marks (veteran investor, author) on Asia:
“He likens China to a teenager whereas Europe and Japan are “economic senior citizens” and the US is a “mature adult”. The big difference is teenagers have their best years ahead of them whereas the senior citizens and mature adults don’t.
Marks says China is poised to grow strongly for decades and therefore “you probably want to have some significant investment there.” – Sohn’s focus on Australia, China and gold, Financial Review, November 23rd 2019
At APN we also believe there is a massive, generational investment opportunity in Asia. While Australia should benefit from this, we launched the APN Asian REIT Fund to take advantage of this opportunity – investing in Asia markets exposed to the region’s growth with ‘developed market’ governance structures.
Asia has half the world’s population and has commercial property assets as good as one would find anywhere in the world. APN’s Asian REIT Fund delivered a total return of 35%1 for the year to October 2019 and has delivered 15.7%2 pa since we started it in 2011. It has a current distribution yield of 4.8% pa3 (for more information please have a look at our website) – we remain optimistic about the Fund’s potential to deliver long term returns for its investors through its exposure to Asia with its ‘teenager’ demographics and growth prospects.
Warren Buffett (investor and Chairman and CEO of Berkshire Hathaway) on debt:
“We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time.
At rare and unpredictable intervals, however, credit vanishes, and debt becomes financially fatal.
A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire.
Rational people don’t risk what they have and need for what they don’t have and don’t need.” – Warren Buffet’s annual letter to Berkshire Hathaway shareholders, February 23rd 2019
History shows us that this is great advice. The AREIT sector for example has learned this lesson since the global financial crisis which saw considerable equity value destroyed – the listed property trust index falling from over 2600 points to below 700 points (it’s now back to over 1600 following a number of strong years but one can see the impact in these numbers).
Many good businesses and good property portfolios have been destroyed (or reluctantly changed owners) due to too much debt. Losing control and the opportunity to participate in a recovery of values following a downturn is a painful lesson to learn. Certainly in the current very low interest rate environment where interest cover ratios (eg ratio of the amount of rental income versus the amount of interest you pay on your loans) look very healthy more debt can be tempting.
APN is continuing to stick with conservative levels of debt across our funds and our investments and sticking with our investment processes which see us with relatively low levels of debt compared with a number of other investors in the sector.
Our average gearing level (that’s the ratio of debt to the value of properties owned) is approximately 32% across our funds’ portfolios and, on behalf of our investors, we are prepared to let a bit of ‘extra equity income yield’ go as a trade off for having a greater level of control over our assets in the event investment market conditions deteriorate. While we appreciate this may be unfashionable for some in the short term – we are confident the long term returns will reward our approach.
The market in 2020
The wise words above are a great reminder of the dangers of forecasting and over-confidence. With them in mind, we are nonetheless as confident as we can be that our brand of commercial property investing is well positioned.
Whether it is via the listed property sector or directly these assets and portfolios remain some of the best quality commercial real estate available for you to invest in.
At APN, we use the phrase ‘Property for Income’ a lot – it’s fundamental to the way we manage our property investments seeking secure, regular and growing cash flows for our investors:
- Strong leases (lease term, tenant business quality, annual rental increases, affordability of rental levels)
- Avoid property investments that are more equity-like in nature, typically where significant proportions of revenue originate from non-rental sources like property development
- Underlying utility (attractiveness for alternative tenants and the cost of replacing the property or competing against newly developed properties to maintain one’s occupancy levels)
Despite the strong recent growth in values in the property sector, we believe that well leased and well located commercial property with appropriate levels of debt continues to look attractive as a source of reliable income and potential growth.
I hope you found the extracts above interesting.
On behalf of all of us at APN, thanks again, have a great break if you are taking time off and we look forward to talking with you in the new year.