Rare Earth Investment Trust Company Limited employs a focused strategy, investing in global real estate and infrastructure assets that are of high quality and exhibit long-life essential service characteristics. These attributes are found in certain global real estate investment trusts (REITs), real estate operating companies (REOCs), and infrastructure vehicles. The investment portfolio includes new format collaborative office properties, logistics/warehousing properties, healthcare and renewable energy facilities, tower communications, data and transportation infrastructure, all of which form the backbone of the global economy.
Being an owner of a globally diversified portfolio of high-quality real assets that generate sustainable and growing distributions over the long-term, investors are rewarded through both growing income and capital appreciation.
Investments are targeted to generate an initial yield of between 5% – 7% and distribution growth of between 5% and 9% annually. The objective is to provide an attractive unlevered return of between 12% – 15% per annum.
We consider the below investment themes relevant when making capital allocations to our real asset portfolio:
The Funds exposure to this type of office accommodation is obtained through a limited number of specialist office REITs who are owners and developers in large cities and concentrate their effort and capital in nodes where TMT (Tech–Media-Telco) tenants wish to be located. TMT tenants’ desire to be located close to the immediately available talent pool, established centres of innovation and in close proximity to capital pools, such as private equity, all of whom gravitate towards these facilities. This behaviour serves to create a dynamic eco-system and “clustering” around the “innovation hub” or tech node. The existence of innovation hubs creates a stickiness to tenants remaining in the node. Furthermore, most often these new format office properties enjoy high green specification and status, which adds to the outperformance of the properties via low vacancies. The resultant cap in utility costs assists in limiting the total cost of occupancy for tenants.
Modern day e-commerce necessitates the need for an entire new supply chain of modern logistics assets. The development of new format logistic assets on the fringe of large urban areas has driven significant value gains for this property class. Logistics property assets are currently enjoying a premium in valuations compared to regional shopping centre formats, which as a sector have traditionally enjoyed premium ratings and valuations. As regional shopping centres and particularly B-class malls are being disrupted by e-commerce we are seeing discounts being applied to their valuations and in many cases their sustainability and relevance is being questioned, as a consequence we seek to avoid allocations to mall owner/operators.
Aging demographics is supportive of these assets, as is the essential service nature of healthcare facilities together with implicit government support that exists in many developed nations. Large scale hospital facilities and the associated clustering of specialist, diagnostic and analytical service providers nearby such facilities, results in “stickiness” to tenancies and are supportive of the “long-life” thesis of the asset class. We tend to avoid high-care retirement residences, primarily due to higher labour content and consider the associated labour cost inflation being a risk to the cash flows of the asset owner/operator. Furthermore, evidence of governmental interference and constant changes in the level of policy support to retirement subsidies can adversely impact cash flow.
The Funds focus is on the ownership of hydro power generation assets which enjoy a “long-life” status of well in excess of 75 years, and are widely considered to be the purest form of renewable energy generation. The Fund has exposure to a fleet of over 200 hydro power generation and storage facilities located on over 85 different river systems in North and South America, the United Kingdom and Europe. Wind and solar energy generating assets are considered for inclusion in the portfolio provided these facilities are not extensive beneficiaries of government subsidies that are subject to change.
The ownership of Tower Communications Infrastructure assets represents a carrier -, technology-, device- and vendor- agnostic way to benefit from the strong demand for data from mobile devices (1 billion mobile devices are thought to be in use in the US alone at present). Keeping pace with demand requires continued capital investment by the carriers, much of which benefits tower owners, be it as a result of the buildout of new spectrum (5G to be launched in mid-2019), or capacity, the densification of networks, or the overlay of new technologies. Tower Communications Infrastructure is vertical real estate that is scalable, with a fixed cost structure translating to marginal revenues in the very high double digits. Planning approvals for the construction of Towers is typically a lengthy process and often met with NIMBY (not-in-my back-yard) opposition, creating significant barriers to entry.
The physical infrastructure required to allow the virtual world to exist. While major tenants are cloud based service providers, the importance of business continuity and data security is critical, these and associated services are in many cases being outsourced and housed in a data centre. SME’s and Large-scale Enterprises alike are all required to utilise this essential infrastructure. Select specialist operators and developers of these technically complex assets stand to benefit from the strong growth in demand for safe data dissemination, data storage and data security.
The Fund seeks exposure to ports, which may include well located inland containerised ports, toll roads, and rail concessions via select infrastructure concession owner-operators across the globe. Major facilities to which we have exposure are located in Australia, Canada, the United Kingdom and Brazil.
A secular shift to urbanisation is fuelling demand for residential accommodation, this structural demand trend is most pronounced in larger cities. The convenience of city living as a consequence of the evolution of smart cities, changes in lifestyle to being more experiential (preferences for travel are ranked higher than apartment ownership) than previously, and a more flexible approach to locality of working, only part explain the drivers of this change. The secular growth in urbanisation is leading to an ever increasing demand for rental housing stock.
Putting it together, the portfolio by sector allocation:
Real Estate & Infrastructure Sector Allocation
Cumulative return graph:
The REIT Fund is currently under incubation and not open to the public
Portfolio cash flow and distributions:
FFO / EBITDA 2019
Distribution per Unit
New format office
The investment company seeks out investments that accord with the above themes and have a demonstrable track record of producing cash flows of high credit quality and are sustainably growing over time.
Other characteristics sought are the employment of modest leverage that is appropriately hedged within the companies in which we invest, ready availability to well-priced capital from diverse sources of equity and debt capital providers, a track record of asset disposals and value-add through modest development, the retention of a portion of earnings, adequate disclosures and transparency.
The company does not reach for yield and considers excessively high yielding instruments to be indicative of underlying cash flows not being sustainable over the short, medium or longer term horizon, and/or symptomatic of other structural or governance issues that are likely to surface in due course.
Long term track record
Hayden Bamford, founder of Alternative Real Estate Capital Management and Steadfast Asset Management, is a qualified Chartered Accountant, having completed his articles at Deloitte & Touché. He worked at Standard Bank Real Estate Finance and subsequently at the Royal Bank of Canada (London) Infrastructure Finance & Debt Securitisation and has in excess of twenty years’ experience in investment markets and financing real assets.
“Real estate and associated
infrastructure has always been a direct reflection of societal needs and as
consumer demand patterns change, so too must society’s shared spaces. The best
investors, developers, owners and operators of real estate understand this, and
embrace strategies that are flexible, accepting and incorporating technological
advancements and trends in order to be competitive.
The evolution of the built environment
is inevitable and will continue to produce winners and losers in this cycle and
beyond. As investors in commercial real estate and infrastructure,
understanding these trends and investing accordingly will be a major theme in
successful investment strategies as the digital disruption continues.”
* The company has been granted a Category 1 Global Business Licence and approval to operate as a Closed-End Fund by the Financial Services Commission, Mauritius. For further information please see www.steadfast-assets.com.
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