Podcast – Listed Property

Stefan Angelini is Joined by Mark Mazzarella to discuss investing into Listed Real Estate Investments Trusts. You'll find out how you can get access to some of Australia's best real estate assets and the why this might be the best investment type for you.

Stefan Angelini

Hey, everyone, welcome to another episode of the investor types podcast. Now, when you think about investing, a lot of people know about investing into Australian stocks. And they think about banks they think about investing into mining companies. But what a lot of people don't think about is investing into Australian listed real estate property companies or developers. So I'm here with Mark Mazarella, who is an expert in this field. So Mark, thanks for coming on, buddy.

Mark Mazarella

An absolute pleasure.

Stefan Angelini

Can you please tell me who you are, what you do and what investing industry in these two properties?

Mark Mazarella

Sure. Well, I'm an assistant fund manager in APN Property Groups real estate securities tied. So basically, what we do is aggregate investors funds and invest that into publicly listed real estate securities called Australian real estate investment trusts. So that is basically the premise of our fund is to put money to work into the listed property sector, but taking a step back me personally I suppose I'm a property value by trade. So I started my career at Ernst and Young, about eight or nine years ago, got qualified as a commercial property value, and then moved into sort of the finance and capital market space and invented APN for almost six years.

Stefan Angelini

Right? So when you say looking at Australian real estate investment companies, so that are publicly listed, so anyone can buy them.

Mark Mazarella

Yeah, that's exactly right. It's probably important to make a differentiation between a real estate investment company and a right so real estate investment trust. The real estate investment trust is basically a vehicle It's used to own the direct assets, and essentially, derive all of its income or the majority of it from the rental income derived from tenants paying rent, much like yourself in this office,

Stefan Angelini

right. So he's a investing two big office building.

Mark Mazarella

That's exactly right. So from office buildings, shopping centers, industrial warehouses, right down to the more specialist classes of vessels. Lack storage facilities.

Stefan Angelini

Yeah.

Mark Mazarella

childcare centers,

Stefan Angelini

okay.

Mark Mazarella

And even petrol stations,

Stefan Angelini

right. So who are some of these companies so people can draw sort of a woman

Mark Mazarella

So when it comes to office buildings, probably the largest in Australia, office specialist rate would be Texas Property Group. So they own another number of assets in Sydney, Brisbane, Melbourne, as well as a couple in Perth. Then there's things like Westfield center group, the Westfield branded shopping centers in Australia shopping centers.

Stefan Angelini

Yeah.

Mark Mazarella

And then of course facility centers, which of course owns part of Emporium here in the Melbourne CBD. And of course, the jewel in the crown cheston.

Stefan Angelini

Yeah. Which obviously generate a lot of income from food outlets from different retail outlets.

Mark Mazarella

That's right department stores a whole host of different retailers essentially.

Stefan Angelini

So when you look at these companies, you try to decide how to invest in two different companies. What do you look at? How do you value these things

Mark Mazarella

I’ll look the first and foremost most most important thing for any real estate investment trust investor is the income. So we have a look at what are their prospects for delivering solid growing income at the bottom line to the underlying investor in the form of dividends. So we have a look at things like their rental income, how high that dividend yield is relative to what this share price is trading at, but also had defensive that is, is it all coming from one tenant? Is it coming from thousands of tenants? Is it all staggered over a period of time? Is it growing? Is it indexed? So every year in Australia, a number of rates have fixed annual rent increases? But others are indexed, say CPI, which of course at the moment is low? And so when you step through that you have a look at well, how good of a management team what's their track record? Do they have a good leasing team because essentially, this is about leasing space. Are they good at allocating capital they buying the right buildings, they doing the right things in the right markets? They add value.

Stefan Angelini

Yep.

Mark Mazarella

Can they spend some incremental money to repaint the walls or refit a section of the shopping center? So you get better retailers in and drive some more foot traffic to drive sales.

Stefan Angelini

So that's obviously very capital injection as well.

Mark Mazarella

Yeah, that's right.

Stefan Angelini

So these companies have to allocate money that they're getting from investors.

Mark Mazarella

Yeah.

Stefan Angelini

Between do we buy something? Do we really something? Do we put a capital into it to make it look a bit nicer? And try to attract even better tenant?

Mark Mazarella

Absolutely, right.

Stefan Angelini

Okay. Yeah. What are you seeing some of the trends at the moment? Are they going into Is there a lot of industrial push for industrial retail? Is that really outperforming?

Mark Mazarella

Yeah, so at the moment, I think if you want to step through the major asset classes office has been tremendously strong.

Stefan Angelini

Yep.

Mark Mazarella

Especially in Sydney and Melbourne, so much in Brisbane and Perth. But they're definitely on the up in those markets. So Melbourne and Sydney is very much been led by a lack of supply. So supply and demand is important across every asset or investment class. And basically you've had a situation in Sydney. Melbourne, where supplies been relatively constrained for a whole host of different reasons, yet demand funnily enough from our benign economic conditions, there's been relatively strong from corporates that need to be in the centralized areas of a CBD to undertake their business.

Stefan Angelini

Yeah,

Mark Mazarella

so we've seen some very strong rental growth, and that's translated through not only to valuation, and the book value or or share price as well, but to the growing dividends from the office dominated rates. And then when you get into the retail sector, we are of course in a low sort of economic environment, GDP growth moderate,

Stefan Angelini

yep,

Mark Mazarella

wage inflation is quite moderate and CPI is moderate. And then you've got the structural backdrop of, of online retail. So online retail has been growing tremendously. But it's started to sort of plateau, and around that eight 9% of total retail sales. Nevertheless, it's been Taking the greatest share of you know, the consumers wallet.

Stefan Angelini

Yep.

Mark Mazarella

So people are more likely to say buy something online than they were many years ago.

Stefan Angelini

Yeah.

Mark Mazarella

And some shopping centers have taken the heat on that.

Stefan Angelini

Yep.

Mark Mazarella

Very much the case that the shopping centers were in the best locations, but in the best spread of retailers, locket, Chad's stone, a performing really well.

Stefan Angelini

Yeah. So you guys really take a deep dive when you look at two different companies. And what I love about it is so we've listened real estate, investment, trust and investing into these kinds of things is that you can do it with any sort of dollar amount where you're looking to your your general residential property investor, that might have smaller capital balances that can allocate towards property portfolio, but we start comparing the assets that you invest in you really allocating towards an income plan, you want an income, which can draw probably the best comparison to someone that invest in commercial property. Someone that might buy a factory that might generate a seven to 10% yield will have high risk factors or someone that might look for a longer term play might want to own the building themselves? Hold on a 15 year lease but might be looking at the moment between a four and 6% named hair. Do you see what you guys do different to or better than invest how people invest into these commercial assets?

Mark Mazarella

Sure, Stefan that's an excellent question that's really at the crux of what we're trying to achieve and deliver with our funds. But not only that, the real estate investment trust proposition at its essence in this country is basically one about diversification. And one about liquidity. So you hit the nail on the head, you can invest for as little as a share in a company or a minimum, maybe our fund is $1,000. And for that thousand dollars, hypothetically, you can get a piece of about two and a half to 3000 different properties, commercial properties across Australia and some offshore. So Think about the tenant risk associated with that you might have a multiple of that number of tenants across that whole portfolio. And you can access it for as little as $1,000, hypothetically, step that back to what you were just talking about, if you want to buy a factory signed forkner, yet might be leased to a manufacturer, a cabinet maker, it might still cost you $800,000, it might yield you about six to 8%. But obviously, there's a lot more risk that you're putting, not only in capital, but in the tenant as well. So if that tenant packs up and leads, then you've got massive income.

Stefan Angelini

You need to be able to have the money there to fund it through interest repayments on it.

Mark Mazarella

Yeah,

Stefan Angelini

until you find someone new to come in, which obviously generates advertising costs and things like that. But these companies that you invest in, they take care of all that.

Mark Mazarella

That's exactly right, given these that the assets that these real estate Investment Trusts that are listed on some of the best that exists.

Stefan Angelini

Yeah.

Mark Mazarella

So for an investor to get access to that quality of set tenant covenant that have to spend millions and millions of dollars, you know, if if say you wanted to take that industrial warehouse and forked it to the next level, and you want to go and buy something in the southeast of Melbourne, that's least to say, tall holdings that might cost you $50 million to access that quality of Covenant, you've then got to really up your ticket size.

Stefan Angelini

Yeah, it's some interesting stuff. But obviously so it sounds like a great investment in Australia. We love the property story that it always keeps growing, it's never going to go down. Tell me about some horror stories that you've seen when it comes to the sort of strong property companies.

Mark Mazarella

When it comes to real estate in Australia. When I tell my family and people that I made what I do, they immediately asked also, what do you think of the residential market? Real Estate in Australia is somewhat of a hobby of the sport.

Stefan Angelini

Yeah.

Mark Mazarella

But when it comes to commercial property, it's relatively simpler. But it's not easy. So one of the horror stories, I suppose that's fresh in everyone's mind is the the GFC. And the impact that that had on the real estate investment trusts, a number of the rates, many of which don't exist anymore for a number of reasons yet found themselves in this perpetual circle of gearing up. So taking on a lot more depth and taking on a lot more risk. So for an example, I think the average level of debt or in a debt for some rates would have gone through to the 60% loan to value. Whereas at the moment, the gearing across the Airaid sector is less than half that so probably about the 28%. Mind you that was through the GFC, where interest rates were at a much higher level.

Stefan Angelini

Yeah.

Mark Mazarella

But they're investing for high growth. Not only that, the debt that we're taking on was short dated,

Stefan Angelini

and that's what you say a little These companies start to fall over when their debt levels are too high.

Mark Mazarella

Yeah,

Stefan Angelini

Mark takes a bit of background, and they just can't find the funder of payments. So they took the view a lot of the rates in the GFC that all I'll take relatively cheap or short duration death, and just rolling over. But it came to a point where that debt market was frozen, not available anymore. So they had to issue equity to recapitalize their balance sheets.

Mark Mazarella

Yeah.

Stefan Angelini

But at the moment, that basically means for everyone out there is they asked the investors for more money,

Mark Mazarella

yes. At a time when a lot of people weren't too confident and have that advantage.

Stefan Angelini

Yes, they want to reinvest again.

Mark Mazarella

That's right.

Stefan Angelini

Yeah. Okay.

Mark Mazarella

Step forward to today and you've got great balance sheets that are in a very, very strong position with less than half the level of debt, but also that debt is long dated, and and there's a higher degree of fixed debt as well. So if interest rates go up, the rates dead cost is relatively low, because they've paid to fix the right. And of course, the debt that they take out is could be five to 10 years in duration, some rates offshore, that take out, you know, access 20 year debt facilities at a relatively fixed cost.

Stefan Angelini

Right. So put we're talking about some pretty big numbers, some big debt levels.

Mark Mazarella

Yeah.

Stefan Angelini

But they're also trying to keep the debt down. That's which is why you, you make your full time job to make sure you're assessing companies properly. And as a company, your company handles $1.6 billion of people's money

Mark Mazarella

correct. Only invested in the Australian and Asian real estate investment trusts listed market is when Australia we've got about $1.6 billion. And of course, that's mainly in a raid fund.

Stefan Angelini

So managing 1.6 billion you can just go into one company and trust that one company, you obviously spread it out. So your is your portfolio always changing.

Mark Mazarella

It is Yeah, look, it's an actively managed fund. We own probably 30 odd positions on average at the moment we might have around there. Obviously part of delivering a solid sustainable income distribution to our investors. That's low risk. You need to be diversified.

Stefan Angelini

Yeah.

Mark Mazarella

So we obviously make the assessment own more or less of some companies. But a number of companies, nonetheless, that will give us a spread across size for liquidity as well as set up and market that we think will get the best exposure to and deliver what we're trying to for investors, which is a low risk, high relative income return.

Stefan Angelini

Yeah, beautiful. So based on that low risk, high income return, leads Australia into what is the top of investor that you think would normally invest into Australian listed real estate investment trusts?

Mark Mazarella

Look, it's basically an investor that's focused on maximizing their income.

Stefan Angelini

Yeah.

Mark Mazarella

It's not for the investor that thinks I'll make a quick multiple on mine going investment. I'm happy to wear a heap of volatility, but I want a quick, sharp game of 50 100% of the IP and I raised funds probably delivered, you know, low teens maintain per annum returns over the last five years.

Stefan Angelini

Yeah.

Mark Mazarella

But mostly we target an income return at the moment, it's yielding 5.95% per annum. And, you know, we say to our investors, if you can get the income return plus a CPI life or better than CPI, like capital growth over a five to seven year period, puts you in that, you know, seven to 9% total return range, that's basically what you should be investing in, in our fund and the rates for

Stefan Angelini

and approx 7% would be doubling your money every 10 years. So that's a good little way to put it in everyone else. So they've got your list. You've learned a little bit about investing into listed or Australian real estate investment trusts are listed Australian Property companies as well. Mark thanks a lot for coming on might look out for next time and hope that hopefully we'll have him on again it.

Mark Mazarella

Thank for having me Stefan. It's been a pleasure.