SIMON BROWN: I’m chatting now with Kyle Wales. He’s a portfolio manager at Flagship Asset Management. Kyle, I appreciate the early morning time. [We are] talking inflation, which is edging lower, but the hard work’s still well ahead of us to get inflation back into those targets from central banks the world over. One normal place where people think oh, there’s inflation out there [is] they rush to gold to some degree. Also commodities. You’re saying hang on a sec, that’s not maybe as risk-free as many think.
KYLE WALES: Yes, Simon. Thanks for hosting me this morning. While historically gold and oil especially, as well as the broader commodity basket have performed during periods of high inflation, there are reasons to think that they might not perform as well in the future. And [now] an asset class like Reits – which has actually been fourth in line in terms of performance during periods of high inflation – might prove its mettle to a greater degree than it has done in the past.
SIMON BROWN: Certainly. I’ve had conversations over the course of this year around Reits as a sort of an inflation-defensive place. But you’re targeting particular ones. The beauty of Reits is often their triple net lease. The administrative costs are the problem of the tenant, and there are built-in escalations. But you particularly like residential and short-term lend, such as hotels and the like.
KYLE WALES: Yes. The problem with escalations with a lot of leases, while they are built in, [is] they’re not always indexed to inflation. So when inflation is very high you actually see real rentals go backwards, whereas with a short-duration lease those leases reprice quite quickly. So if you look at your typical residential lease, for example, the rental gets renegotiated after one year. With hospitality leases, they are typically benchmarked off occupancies, and with storage leases they also are very short term in nature, so they get repriced fairly quickly.
SIMON BROWN: To your point, most of those are either annual leases, although of course in the case of hospitality they are night by night. You mentioned hotels there; is it the owners of the hotel or also only the operators? I’m thinking for example of a City Lodge.They take perhaps a lot more risk than the owners of the buildings, which in the case of City Lodge is the same, but not always.
KYLE WALES: Yeah. The operator – there’s obviously a distinction between the two, the person who owns the property and the operator of the hotel. The operator of the hotel might still suffer from lower occupancies, especially when the economy is performing poorly, whereas the owner of the property actually tends to do pretty well because the nightly rates get pushed up when inflation is very high.
SIMON BROWN: Yes. And they can win from that. In preference is this looking for local or perhaps some more offshore, because of course inflation is a worry everywhere for the first time, well, in my career.
KYLE WALES: My preference is always for offshore assets, but locally there are a couple of Reits which tick these boxes. Unfortunately hospitality, which used to be exposed to the residential hotel property sector has now been purchased by, I think, Sun International.
Whereas you do have Stor-Age in South Africa within the storage unit market, unfortunately with residential Reits as well you have local Reits that do have exposure to rental properties, but typically they are bundled with a lot of other stuff too.
Globally one very interesting product we are actually invested in is an ETF called Nuveen, which basically invests in a basket of those three types of residential properties across the US.
SIMON BROWN: Okay. So actually now it’s quite simple, because I was going to say, “What in the US?” But there’s an ETF, which makes it for the investor a whole lot easier. That then sort of picks it and does the heavy lifting for you.
KYLE WALES: Yes. And it doesn’t overly expose you to any one of those sectors. So you get a nice broad-based exposure to storage units, to hotels, to residential departments or single-family dwellings.
SIMON BROWN: Okay. That’s Nuveen, N-U-V-E-E-N. Kyle, I appreciate the time. Kyle Wales, portfolio manager at Flagship Asset Management, I always appreciate the early morning insights.
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