The Fund posted a positive return during December but underformed the benchmark. Performance was very spread out with eight of the clusters contributing positively and ten detracting. A larger outperformer over the month was the traditionally volatile US Triple Net cluster where our overweight in Broadstone Net Lease REIT, a position which we have held since its initial listing in September, returned 12% outperforming the 4% return of the cluster. Underperforming clusters for us were our two Japan clusters (REOCs and REITs). Mitsubishi Estate slightly underperformed on no particular news. The question whether the surge in COVID-19 cases would cause the government to call for a new State of Emergency (lockdown) spooked the market. In JREITs, our holdings Invesco Office REIT and Kenedix Office REIT reported results in December. Both assume tenant departures for the upcoming period which is expected to move occupancy down to 97.4% and 95.7% respectively (from 99.2% and 98.1%). Invesco sees this as a risk whereas Kenedix sees this as an opportunity to re-lease at higher rents.

The month of December was a bit more stable than the abnormally positive November sparked by the news of the Covid vaccine. Real estate markets continued digesting the positive news yet still continued a more measured path upwards returning +3% over December in local currency. The best performing clusters were Switzerland and Japan REITs at +7% and +6% respectively. The former was likely aided by the “safety premium” as European countries entered another round of more strict lock-down measures. The weakest performers were Japan REOCs and Canada returning -4% and -3% respectively with the latter showcasing weakness in retail.

Over 2020 we saw tremendous volatility and dispersion in listed real estate with the best performers being unsurprisingly European Residential at 22% for the year, followed by US Industrial & Storage at 13%. The regulated rents by German residential ended up proving their worth in a down-market offering good cushion and downside protection in the face of the extreme uncertainty that the Covid pandemic had brought on. On the other hand, despite a strong vaccine driven November month, the weakest performing clusters were US Retail and European Diversified (where European retail sits) at -32% and -27% respectively. Despite strong November months, landlords such as Unibail-Rodamco-Westfield and Simon Properties still ended the year down 50% and 38% for the year.

We like seeing volatility and dispersion within our clusters. For example, in the UK over the year we saw retail names dropping by over 80% and logistics names returning over 10%. In a single sector cluster such as US Offices we saw a drop of over 30% in New York focused landlords such as Empire State and Paramount versus low single digit drop of flat performance of names like Easterly Government Properties and Corporate office Properties Trust (generally away from the highest impacted gateway markets of New York and San Francisco). We have taken steps to adjust our models on the back of the drop of 15% of market rents in some of the gateway markets but still see them as longer-term attractive markets with shorter-term issues of demand (in San Francisco) and mostly supply (in New York).

During December, the Swedish invasion of Norway intensified with Entra ASA receiving higher bids by both Castellum and SBB I Norden (SBB). The first revised bid came from Castellum valuing the company at around 185 NOK per share (or 14% higher than its first bid) and simultaneously selling a portfolio of mostly logistics (and some offices) assets to Blackstone for a yield in the high 4% range for a total sum of 18.7bn SEK. These proceeds allowed Castellum to offer a higher cash component of 30% of the total. Castellum offered 8 of its own shares for 13 shares of Entra plus a 54.4 NOK per share cash part. Subsequently, just before the Christmas holiday SBB raised its bid by 3% to a price of 190 NOK with a substantially higher cash component than Castellum. We saw the value of Entra and any possible combination fully priced in at these price levels hence had found significantly better valued relative opportunities elsewhere in the Nordics from the proceeds of our position in Entra. As this saga was unfolding, Balder had been buying shares on the market to build up a 15% position in Entra. Whilst initially the company’s CEO Erik Selin commented that they would rather see Entra remain as a listed entity, the tone quickly changed to a comment that there is a price for everything. We find the timing of this purchase questionable and a little but unnerving, given the close-knit nature of Nordic real estate. We had flagged in the past that governance, interdependence and transparency had been structural issues in that region and we would continue to monitor the situation with close scrutiny.

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. The month of December saw us conclude an engagement with Tritax Big Box REIT in the UK with an unfavorable result. We had been engaging with the board to hire external consultants and provide investors with a cost/benefit analysis on the internalization of the management contract of Tritax Management LP for the REIT. Surprisingly, during December, it was announced that Tritax Management had sold a 60% interest to another party (for an undisclosed prize). This essentially eliminates the chance of internalization over the next five years as the acquirer will surely find the stable, growing and predictable investment management fees from Tritax Big Box REIT attractive and would be likely to hold onto that investment. Unfortunately, we have seen no improvements in the corporate governance of the REIT and will look carefully at the additional potential conflicts of interest that may arise from the financial acquirer of Tritax Management LP. We may yet reopen the engagement in the future.

During December we made several changes to the portfolio. In the UK we have been trimming our positions in Derwent and Workspace in favour of residential landlord Grainger. Our highly successful UK offices trade is now again screening expensive versus the high quality private residential (PRS) landlord. In the Nordics, we sold out of the position in Entra ASA and invested the proceeds in Stockholm specialist Fabege. Entra ASA outperformed significantly on the back of the ongoing bidding war between Castellum and SBB and hence we saw better opportunities back in Stockholm which is one of the highest scoring long term office markets in Europe based on our property scores data methodology. In the US Logistics & Storage cluster we sold part of our position in Prologis and exited PS Business parks in favor of Eastgroup. In US Healthcare we entered into Welltower by exiting Alexandria and trimming our position in Healthpeak. We improved our assumptions on senior housing to account for the vaccine which triggered the trades. In the US Triple Net lease cluster we exited our position in WP Carey and entered back into Realty Income as we saw the latter being overly penalized for its small movie theatre exposure. We continue to focus on refining our models and continuously challenge our assumptions to better fine tune our valuation estimates across our universe.