Holly Old:
Hello and welcome. My name is Holly Old and I'm an account director with Bennelong Funds Management. And I'm so pleased to be joined for this update today by Chris Bedingfield, co-principal and portfolio manager with Quay Global Investors. Welcome Chris.
Chris Bedingfield:
Good afternoon, Holly. How are you?
Holly Old:
Very well thanks, Chris. Before we begin today, I think it's important that we take a moment to acknowledge the traditional custodians of the land on which we live and work and to pay our respects to elders past, present and emerging.
Chris, I've got a few questions I wanted to cover off with you today, but I thought we might start with a question about reporting season. We're in the depths of it at the moment now. How is it all playing out from your view?
Chris Bedingfield:
It's been a long reporting season. One of the joys of global investing is that it starts in the second week of July and then finishes pretty much the last week of August, so it's seven solid weeks of reporting. The Americans like to go early and the Brits are sort of in the middle and then Aussies for some reason sort of bring up the tail.
Look, by and large, it's been a pretty good reporting season for us. We've had some really good results relative to our expectations and I guess relative to the market expectations. The real highlights for us would be in the US on the apartment side and single family housing side has been really positive. We've also seen some really good results coming out of student accommodation in the UK and self storage in Europe have all been pretty solid.
I suppose the one area that has been good, but expectations were pretty high, has been in senior housing, which has continuing to show some very, very good occupancy gains. People that have followed us know that we've got a large exposure to that space. Good occupancy gains, but some headwinds in terms of operating costs. So more so than most other forms of real estate, there are labor costs associated with senior housing and unless you've been living under a rock, of course, labor costs have been rising, particularly in the US. So that's been a bit of a headwind, but by and large looking at the bigger picture in senior housing, it's the occupancy gains that we're there for and the leverage that we get to that is we expect that demographic boom to come through.
So it's been a, by and large, pretty good reporting season so far, actually,
Holly Old:
Chris, I just wanted to draw your attention today to a couple of questions I wanted to ask you around a fantastic investment insight that the team produced, that we email to investors and publish on our website. And these investment insights cover a range of topics but the one I wanted to focus on today is your latest piece, which is titled 12 Charts We're Thinking About Right Now.
And interestingly, this has been an article that the team have released in previous years, sort of around the same time every year, and has actually proven to be one of your most popular thought pieces. So I thought it'd be a good chance to have a chat through a couple of the charts that are in this year's thought piece.
Chris Bedingfield:
Yeah, we didn't realize actually it was coming out the same time every year. There must be something about it. We just thought there was just so much going on in markets right now that it was just too much to write about and too many words to put down. So we cheated a bit and put out the charts, which I think people like, because a picture tells 1,000 words as they say, so more than happy to elaborate on that, actually.
Holly Old:
Excellent, perfect. And I think I agree with you there that, yeah, pictures say so much more in such a concise way. One of your first charts in the topics today is around inflation and I know everybody's sort of done this bit to death, but maybe just a couple of bullet points around your thoughts on inflation, whether it be transient, embedded. Where does the Quay team sit in their views on inflation at the moment?
Chris Bedingfield:
Yeah, that first chart, I mean, there's the big macro question in investment markets right now, not just about inflation interest rates, is whether central banks are going to orchestrate a soft landing or whether we're just going to crash into a recession. I suppose that's the big question. I mean, central banks made it very clear that they want to get on top of inflation and they'll do what it takes. So is it going to be a hard or a soft landing? And I think that chart, for people that don't have it in front of them, it looks back at what we think is the more relevant period when thinking about inflation in the current context.
A lot of commentary saying, "are we back to the 1970s again with stagflation?" It doesn't feel like that. US job growth 500,000 last month doesn't feel like bad economic environment. We feel like it's a bit more like 1947 where inflation back in 1947 in the United States and similar in Australia, was running at around 14.5%. Two years later, it was -1%. It was all but gone. And the Federal Reserve really didn't do much at all, but I think they lifted interest rates by around half a percent, I think we wrote in the paper.
So how did they get on top of it? There was a very, very soft, mild, sort of two quarters of negative growth in 1948, but it certainly wasn't a hard recession. So essentially it was a soft landing back in '47, '48 and '49. And when you think about 1947 and why that's such an interesting year, it's two years after the Second World War, the US economy was geared towards... It was a war economy. Instead of making cars and refrigerators, it was making bomb and planes as part of the war act. And then obviously 1945, the GIs came home and a bit like COVID, you sort of had this instant sort of reopening of the domestic economy almost instantaneously as the GIs came home and started to set up homes and start spending. And you had a manufacturing base that had to retool itself and rejig itself back to producing domestic items.
And that sort of supply chain disruption feels as relevant today as it did in 1947. So if we're going to try and draw any parallel, I think 1947's quite interesting because of that same disruption that we had. It wasn't a war of course, but we did have to retool and restart the manufacturing. Is it transitory? I mean, it's a word that I think will mean whatever people want it to mean. But for us, we still are living with COVID from an economic point of view. I mean, we still rely on parts of the world for some of our supply chain. China is still very much going through these rolling lockdowns. That has an impact. And so, yeah, I mean, if you wanted to label us into one pot, it would be transitory.
But I think that chart says, "don't write off the idea that once everything normalizes as per 1947, we could get out of this with quite a soft landing." And that is really bullish for equity markets and I think at the time of recording this, we've had a pretty good rally out of reporting season in markets and I think people are starting to maybe factor in maybe more of a soft landing than a hard landing. So it's certainly something worth looking at and considering is that post World War II inflation episode we had.
Holly Old:
At the start you mentioned the reporting season's been really positive for apartments and single family housing. A few of the charts in your investment piece talk through a bit about the US housing piece. Do you want to maybe chat a little bit about that for us? Where it differentiates, maybe to what is happening here in Australia in terms of supply/demand?
Chris Bedingfield:
Absolutely. We were so close to writing this paper just on US housing and then changed my mind because we had so many other things we wanted to talk about. But that's why we had quite a few US housing charts in there. When you look at some strategists and some commentators at the moment, we always feel like we're fighting the last war in economics so there is this sort of reflex action that we had really strong house - let's talk about the US for the moment, but Australia's similar - we have this really strong price recovery in residential prices as we came out of COVID and now we're seeing mortgage rates lift quite strongly. And the fear is that, "oh, no. Here we go again, we're going to have another housing crisis. We're going to have a lot of defaults. We're going to have a lot of bad loans and whatnot." And we just don't buy that narrative.
It's certainly being priced into listed REITs at the moment, particularly single family housing REITs at the moment. But when you look at the data, there's a couple of things that are worth talking about. First of all, when it comes to single family homes, we've gone through 12 years of massive undersupply. The industry normally would build around a million to a million and two homes a year. This is single family homes. And for the last 10 years, we've averaged around 500-600 000. So you accumulate that short for over 10 years, some estimates are as much as five or 6 million home shortage. That was very different to prior to the GFC where new home construction boomed. That's the first point I'd make.
The second point I'd make is yes, we are seeing rising inventories for sale, but coming off an extremely low base. I've got a chart there showing inventories as a percentage of inventories in 2019 are still roughly half of what they were, so they're rising, but they're still at a very, very low base. But I think nothing tells you more about demand and supply about US housing or housing generally than the rental market. You have the occupier market in residential, and obviously people occupy their own home. And then you have investors that might own a second home and rent it out.
And that really gives you a good idea of the true demand supply dynamic of the residential market. And when you look at Australia and you look at the United States, rents are growing so fast. In Australia, it's around 9%. In the US it's double digits. And that gives you a really good feel for the true underlying supply demand dynamic. Right now listed REIT prices are down because there is that, what I would say, a sort of a fighting the last war type mentality that markets have sometimes. But the data and the economics are so different this time around, so it's a big, big opportunity.
And certainly in the fund, we are very, very, very overweight residential, single family, residential United States, because that supply dynamic is working in our favor, but it's also got a terrific demand story as well, that the Gen Y's are now in their early forties, they typically rent homes as opposed to apartments. So the single family market's got a really strong demand story and a constraint supply story but the market is pricing for another GFC, or some in the market is pricing for another GFC, and we just think that's a massive, massive opportunity.
Holly Old:
I think the most scary thing you said there was that Gen Y's are turning early forties.
Chris Bedingfield:
Yeah, I know. 1980 is Gen Y, is when they were born, so. But the median, that's when they go into single family housing, right? They're coming out of the apartments. We owned apartments eight years ago when we launched the fund because we've been following them and we've made a lot of money out of apartments. We've made a truckload of money out of apartments. Stocks like Camden and Mid America Apartments and Essex Apartment Investment Co. Back in the old days, we owned a company called Home that got taken over.
We've done really well out of it, but the median age of an apartment renter is 33. The median age of single family is 40. We're just following that bubble through and we can buy the underlying real estate at dirt cheap prices with this great sort of demographic story behind it.
Holly Old:
Excellent. Thanks, Chris. So one other area I'm really keen to get a couple bullet points on from you is around retail. With rising interest rates, a challenge consumer. a lot of people out there saying that brick and mortar retail is dead in the water. I know the team have a bit of a different view on that. Could you share a few points around your thoughts on where we are with retail?
Chris Bedingfield:
You would've seen consumer sentiment over the last six months has been terrible around the world, here in Australia, in the US. The largest mall loaner in the United States, Simon Property Group, reported about a month ago or probably three weeks ago. They beat expectations, raised guidance, 200 basis points increase in occupancy, firing on all cylinders. And it's kind of caught the market a little bit by surprise because I think what's happened is that retailers, their customer acquisition costs, which is one of the charts you're probably referring to in this pack.
CACs, customer acquisition costs, have been rising all around the world and what is customer acquisition cost? It's basically marketing expenses that online companies are paying to access customer data and to acquire customers for their retail goods. And it's rising because we're getting stronger privacy protections through companies like Apple, who are allowing you to opt out in terms of privacy. And also companies like Google in terms of search are charging more and more so that your products are sort of getting to the top of any sort of Google search if you're selling online. So retailers are working out very quickly that the cost of doing business online isn't free. In fact, it's becoming very, very expensive. And it's not just about winning the customer over, it's keeping the customer as well.
So what we are seeing and we're seeing it in the US and I think we're going to see more of it in Australia, is that bricks and mortar is going to be an absolutely critical part of an online strategy. Retailers will need to have a great online strategy, but they still need that bricks and mortar to supplement that online offering because if you're just 100% online, you're taking on Amazon whose shareholders clearly don't care whether they make a profit or not, certainly not in retail. So you're not going to win on price, you're not going to win on product, and you're probably not going to win on distribution. So to differentiate yourself, you need to be in that bricks and mortar store and we're seeing that in the data now. We're seeing it with the Simon result, we hope to see it in the Center Group result coming up. We're certainly seeing it in companies like Vicinity.
So bricks and mortar retail, the customers want to be there, the tenants want to be there. The market just hasn't worked this piece out yet, and you can still buy these companies. We own Simon Property Group, single PE multiple. So there's good opportunities out there and this is where the reality's different to the narrative. We've got so many good opportunities, we don't have tons of retail, we're very selective, but we do have some exposure there and we're not afraid to be in the space.
Holly Old:
Excellent. Thank you very much for your time today and the information that you shared with us. Good luck for the rest of reporting season. May it go quickly, may it go well. And before we sign off, I also just thought it was important to mention that we have also recently launched a hedged version of your legacy fund, the Unhedged Quay Global Investors Real Estate Fund. So that is available for investors at the moment. It is available on most major platforms. So please speak to your Bennelong account manager if that's something that you're interested in.
If you don't already receive the team's thought pieces and would like to, please just click the subscription link at the bottom of the podcast webpage and then subscribe to the insights. Or otherwise, please just reach out to your account manager or our client experience team.
That's the summary, Chris.
Chris Bedingfield:
Thanks, Holly.
Holly Old:
Thank you again for your time and we'll chat with you soon.
Chris Bedingfield:
Great. Great to be with you.
