The Fund posted a negative return during January and underperformed the benchmark. Performance was very spread out with eight of the clusters contributing positively and ten detracting. Outperforming clusters included European Diversified, where our overweight position in logistics landlord Warehouses de Pauw kicked off earnings showing strong numbers and an increase in its accretive portfolio growth target by 33% (to €2bn from €1.5bn) by 2023. Underperforming clusters over January included US Offices where our value based overweight positions in Highwoods properties and Piedmont lagged the larger benchmark names. We also underperformed in the UK where our OW positions in Grainger and Workspace were out of favor for the month, but very much represent good value going forward, in our view. The US Triple Net cluster’s elevated volatility also went against us over the month as our overweight position in Broadstone Net Lease (an outperformer last month) ended up reversing its gains in January.

The first month of 2021 saw the continuation of the stability for Global real estate as markets were slightly negative. Generally, investors appear to have repositioned swiftly after the large November rally and are waiting on the beginning of the earnings season to assess how the fourth quarter has gone, and more importantly what the management teams’ outlooks will be for the path of the vaccine-led recovery.

There was yet some dispersion across the sectors with outliers on the positive side being US Retail returning 8%. This is going to be short-lived in our view (and has begun to unwind in the beginning of February) as retail based buying activity targeted stocks with high outstanding short interest such as Macerich and Tanger (+47% and +57% over the month). Japan REITs also caught a bid returning 4% over the month and the strength was broad based in the traditional sectors of office and retail. Aversely, European Residential had the weakest return at -7% with Vonovia leading the way down 8%. Whilst there was no company specific news it is possible that a large cap such as Vonovia can be targeted for generalist rotation out of real estate into other sectors. US Hotels and US Triple Net REITs dropped 5% and 4% respectively as clearly the lack of clarity on broad societal reopening has and will continue to cause for further lost net-operating-income and abatements, some of which may never come back.

During January CA Immo, a company focused on office real estate in Germany, Central and Eastern Europe received takeover offer from Starwood. Starwood already owns 30% if the company and put forward an offer price below the company reported NAV. Later in January Bloomberg reported that Aggregate holdings is considering a rival bid for the company. Our main takeaway is that in strong office markets, and for high quality assets, there is still investors’ appetite despite the current headwinds from an economic slowdown and the potential longer term impact from Working From Home.

The start of the new year saw further news in the Nordics bidding war for Entra. At the end of the month, the board of Entra formally did not recommend either of the Castellum or SBB offer to its shareholders on the basis of significantly further shareholder value remaining in Entra as a standalone company. We suspected that this may be the case as neither deal was optimal with both deals coming with significant stock components of the offering entities, thus ultimately significantly shifting the exposure to the Entra shareholder. We had sold most of our position as we found better relative value elsewhere at the end of last year. However, we did tender our Entra shares into Castellum’s offer as we believe that the strategic fit is stronger, the price is attractive and the Castellum shares offer more upside than SBB’s shares at the offer prices. To make matters more interesting, Nordic wide landlord Balder continued buying Entra and are reported to have now 25% of the outstanding shares putting them firmly in the driver’s seat of any future decisions regarding Entra.

The Kempen real estate investment strategy strikes the balance between qualitative and quantitative analysis. Through application of data-analysis technology our Real Estate Team collects over 20 million relevant data points for 200,000 real estate buildings around the globe, processing this quantitative data in our data infrastructure and turning it into valuable fundamental investment information. The continuous increase in available data helps us make better assessments of the quality, value and risk of each real estate investment. This leads to better investment decisions and results in higher investment returns at lower risk for our clients.

Next to the quantitative approach the investment strategy contains three key qualitative parameters that determine the warranted valuation: management added value, balance sheet strength and ESG. The portfolio managers score each company covered on these three parameters. Companies that excel in ESG for example will be assigned a higher score and hence the warranted valuation for an investment increases.

Portfolio construction of the Strategy is based on cluster neutrality. The Global portfolio has 18 clusters defined as homogeneous groups of real estate companies with similar underlying currency exposure. Examples are Australia, US Offices and Switzerland. The portfolio weight of each cluster is approximately equal to the cluster’s benchmark weight. This ensures a diversified portfolio and neutralizes currency and macro-economic exposure versus the benchmark. The Fund assigns its risk budget on the real estate portfolio level only.

ESG is of high importance to our investment process. During January we engaged with the election committee of the board of Nordic office and logistics landlord Castellum. We expressed concern over the nomination of Rutger Arnhult as chairman of the board after the issue had been promptly raised by two members of the election committee. As we have mentioned previously, the Nordics score below the global average on our governance score which directly affects our proprietary company score for each vehicle and thus lowers the price we are willing to pay for a company, all else equal. In that context, Castellum currently scores the highest based on what was an exemplary diverse and professional board with no conflicts of interest and strong practices of transparency. With the nomination of Rutger Arnhult, we raise issue of potential conflicts of interest (having been recently CEO of Klovern, a competitor of Castellum) with some questionable strategic directions for the shareholders of that vehicle. We also raise issues of Mr. Arnhult being over-boarded and potential excessive influence over minority shareholders by quick nominations of directors from his inner circle. We urge other shareholders of Castellum to support the alternative board proposal by current but soon retiring chairwoman Charlotte Stromberg to help preserve the objectivity and balance of the board.

During January we made several changes to the portfolio. In US retail we took advantage of the rally in lesser quality/higher leveraged retail and trimmed our position in Site Centers towards Federal Realty and Weingarten. All the trading in this cluster has been in strip centers as we have kept our exposure to malls at zero for some time. In US logistics and storage we began trimming Americold in favor of high quality coastal urban logistics landlord Terreno Realty. We also sold part of Public Storage and reinvested the proceeds in Extra Space Storage purely as a result of share price moves. In US Healthcare we continued our switch into large-cap Welltower from Healthcare Trust of America. We adjusted some of our assumptions to price in a stronger recovery from a senior housing business which has been materially hurt from the pandemic. However, with the vaccine news, and the marginal improvements to our numbers the stock has proved to be attractively priced again at this point. In Canada we sold our position in multi-family REIT Killam Properties as the company outperformed the market and reinvested it in our second Canadian holding Granite REIT which lagged over the month. Additionally, we readjusted our long term growth assumptions and capital expenditure figures for the Canadian multi-family REITs as a direct result of our recently enhanced Canadian residential property scores. We suspect that volatility continues to remain elevated throughout the upcoming earnings season and are keen to hear more from the management teams on their views on the speed and depth of the vaccine-led recovery.