The Fund posted a positive return in June and outperformed the benchmark. The strongest outperformance came from the US Triple Net cluster due to our overweight positions in Broadstone Net Lease and STAG Industrial, the former of which benefited from index inclusion and from the size effect. Away from the US, we also had a strong month in the European Diversified cluster where our overweight positions in Irish office landlord Hibernia REIT, logistics specialist Warehouses de Pauw and German office specialist Alstria, ensured we stayed away from weak performance in retail and in large benchmark weight Aroundtown. Aversely, the UK cluster detracted from performance over the month predominantly due to our overweight position in Workspace. The stock’s short-term return was impacted by the UK postponing further re-opening as the Covid delta variant has been gaining traction. This has caused for occupancy to remain low for the time being. Additionally, US Retail underperformed over the month on no specific news, as our holdings in well located and attractively valued strip center retail REITs underperformed after a strong relative return leading up to June.

June was yet another positive month for listed real estate around the globe with the index returning +2% for the month in local currency. Dispersion across clusters had narrowed a bit, especially compared to the heavily elevated levels of last year. This is to be expected as the gradual return to normality both in the real economy and financial markets takes center stage. Noteworthy clusters were US Healthcare and J-REITs at +4% for the month, and Canada and Australia at +3% for the month. The latter two clusters were surely helped by general macro related strength in commodity markets. On the other hand, negative performance was observed in the European Diversified and US Offices clusters at -1%. With the month of June being one naturally quieter on the news front, attention should quickly shift to the earnings season which begins at the start of July. We expect companies to provide some more guidance on the pace of return of some of the lost income due to the pandemic and more importantly, to shed some light on guidance for next year in 2022 as several companies had chosen to wait it out and see before being held against an initial inaccurate forecast.

From a macroeconomic high level view, we are seeing the acceleration of the pace of vaccination in most economies around the world. However, the delta variant of the coronavirus is something to keep an eye on as it has the potential to delay some of the projected reopening based growth in several economies. This has already been evidenced in the UK which, despite having been amongst the earliest out of the gates to vaccinate (alongside the US), has ran into issues with the quick spread of the delta variant. Real estate markets are still sitting in a good spot with elevated levels of cash rich institutional investors chasing not only safe assets, but also beginning again to add to riskier assets (as well as in the core plus and value add space in the private real estate world). On the equity markets, this allows us to capture various opportunities that arise from equity price dispersions between fundamentals and fund flows. Fundamentally, we have seen cash rent collection levels returning in seriously challenged real estate properties such as movie theatres, gyms, secondary offices and physical retail. Probably the biggest surprise over the month has been the fact that several retailers have recorded better than expected footfall figures since reopening its doors. Whilst this is a positive for short term income we are still convinced that, barring several extremely resilient locations, many of these properties will continue struggling in the long run with minimal rental growth and ever more so continuing capital expenditure requirements.

Over the month the inevitable became official as Washington Prime Group became the latest secondary mall REIT to file for chapter 11 bankruptcy in the US. This REIT was spun off of Simon Properties REIT back in 2014 and follows the bankruptcies of CBL and Pennsylvania REIT which filed back in November of last year. Prior its filing, the REIT’s debt levels of c.$3.5bn were close to practically wiping out any asset value tied to equity which was thought to be around $4bn and on some forecasts materially less. Some emergency rescue equity raises and high interest credit lifelines are surely to be part of this restructuring package and the future of the company will still continue to be uncertain. These events continue to act as foreshadowers for many European retail landlords which are struggling with high leverage and questionable valuations under the backdrop of a difficult operating environment for physical retail.

On the other hand, during June we saw further support for valuation growth in the continental European logistics market. Dream Industrial REIT announced the acquisition of a portfolio of 31 logistics properties from Clarion Partners Europe. The portfolio comprises 827k sqm in six European countries. The assets are valued at €882m translating into an 4.2% cap rate. The portfolio is fully leased but offers potential to add value via the adjacent land to several assets. Bottom line another significant positive for the logistics subsegment not only seeing operational strength but also continued strength in the investment market.

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 and has been so since 2011. During the month of June, we held an engagement session with Canadian logistics specialist Granite REIT. The focus of the discussion was on sharing best practices on setting science based climate goals, measuring progress and verifying all scopes of greenhouse gas emissions. We have been successful with engaging on transparency before with this REIT and are encouraged by the positive reception from the management team. We also engaged with Japan Hotel REIT about its ESG rating which had affirmed various data quality issues from ESG data vendors which we will touch upon further via a white paper shortly.

During June we made several changes to the portfolio despite seeing volatility dissipate a bit. The changes were largely the result of stock price moves as it was a news light month hence few modeling changes were implemented. In the European Residential cluster, and after having seen certain selling pressure in Vonovia due to its cash offer for Deutsche Wohnen, we took the opportunity to sell a portion of Finnish residential specialist Kojamo and reinvest it into the large German residential landlord. In Australia we completed our rotation from office specialist Dexus into retail landlord Vicinity largely based on a relative valuation gap which we see very much stretched. After continued strong performing month of diversified US Triple Net landlord Broadstone Net Lease, partly due to its inclusion in several indices, we have exited the position to reinvest partly into diversified (and multi-national) peer W.P. Carey and partly into heavily discounted experiential real estate specialist EPR Properties. In Japan we took advantage of the risk rally and trimmed our position in office landlord Japan Excellent and reinvested in logistics specialist Nippon Prologis as an attractive valuation gap emerged. In the US residential cluster we continued our relative trade from mobile home community landlord Equity Lifestyle into better valued Sun Communities.