“In short supply are managers who are wise – by which I mean discerning, reflective and able to judge what’s correct and what’s wrong” – Jim Rosenzweig, The Halo Effect
Our operating earnings per share guidance for the year was 2.35 to 2.65 cents per share with the actual result being 2.63 cents. Two features consistently emerge in our results. First, the improving quality of our earnings, and second, the modest valuation given on our Funds Management business applied by the market. Our balance sheet remains strong and our ability to raise capital for sensible opportunities has been enhanced thanks to the efforts of our team.
There is little doubt the best commercial property buying opportunities occurred around 2013 when the market finally lifted due to easy monetary conditions and then took off after European Central Bank President Mario Draghi’s “whatever it takes” speech. Since that time value has held up quite well but ‘fast money’ is now seeking higher returns, moving into growth stocks and looking for opportunities offshore. There is much more excitement for easy money to be made in these sectors. The consensus might be described as follows: “The market is engaged in late cycle investing, is aware of the risk and aware of the past but seems to believe this time it will be different”.
I hope this time it will be different, but with the memory of the global financial crisis (GFC) still warm, we prefer to manage our business on behalf of shareholders on the basis that it will not. Daniel Kahneman and Phil Rosenzweig win Nobel Prizes and accolades for their brilliant insights but many investors continue to ignore their sage advice. Unfortunately, it is usually the young, leveraged investor/fund manager who suffers as a result of overconfidence.
If it is different this time, it may be that return expectations from here and post a downturn will be very modest. Any downturn in property may be moderate and we think this is starting now. This backdrop is fertile for APN and, subject to the usual caveats, we can grow earnings strongly in the medium term.
We continue to endorse “Property for Income” as a commercial real estate investment approach. We also continue to see negative market forces, referred to in my letter here last year, remain alive and well: Government intervention; Chinese capital controls; Bank retrenchment and technological disruption. Market overconfidence is waning. There are still headline results which are confounding but pockets of value are emerging and competition is thinning. Quality income streams will perform well through any market downturn. We believe that any equity market disappointment in stocks with high price to earnings multiple will increase the importance of these quality income streams for investors.
We remain acutely aware that higher than market returns can only be achieved through prudent acquisition. Active management remains important. APN is well placed in this environment to grow our funds under management.
Since the GFC we have been patient in growing our investment track record and my personal opinion is that the market is yet to fully recognise this performance. Under the radar we have quietly put in place a young, ethical team with Tim Slattery at the helm. Our governance is excellent and our culture of putting our investors first is aligned with our long-term horizon for APN’s growth. The Hayne Royal Commission has highlighted the gulf between market expectations and provision of ethical investment service. Our prosperity depends on integrity and we believe the culture we have developed over the recent past now gives us strong leverage in our marketplace.
In summary, lower future returns, today’s late cycle investment, and the need for excellence in governance is our current view on the investment landscape. APN, in this environment, believes it can grow shareholder returns over the medium term. The possibility of higher returns exists, should the market pull back.