Let’s get the big takeaway in first. This was a rather good reporting season. Unfortunately, short term share price volatility is pushing this simple fact into the background.
Between July 1st and December 31st last year, the total return (that’s capital growth plus dividends) of the S&P/ASX 200 AREIT Accumulation Index was a healthy 9.8%, outperforming the S&P/ASX 200 Accumulation Index by 1.4%1.
Then US bond yields jumped by a third, prompting a fall in AREIT prices. In the first two months of this year, the AREIT sector’s total return declined by 7.0%, versus the equity market which has been flat over this period. Falls of this ilk get attention but are small beer for genuine long-term investors. In fact, they’re often an opportunity.
Anyone with an eye on long term performance should take reporting season as an opportunity to re-examine their investment theses and check whether everything is on track. What they should not be doing is making assumptions about the future based on short term swings in share prices.
What does this mean in practice? Well, income-focused managers like us concentrate on the factors that support the sustainability of income – rental growth, occupancy and asset values. Which is a polite way of saying we have little regard for short term total index returns and US 10-year bond yields than we do net operating income (NOI), NOI growth, occupancy and asset values.
In that regard, this reporting season was, just like last time around, rather good. The outlook for distribution guidance for every AREIT in which we invest was either re-affirmed by management or upgraded. And the interim results certainly supported prospects for continued delivery of the defensive income returns our investors are seeking.
These satisfying results were achieved despite a domestic economy still stuck in second gear. The table below (calendar year) shows GDP growth, core inflation and wages growth lower than it was two years ago, as was the case in the reporting season covering the 2017 financial year.