The AMP Capital Wholesale Australian Property Fund (“the Fund or WAPF”) is an open-ended property fund that invests in a diversified portfolio of direct commercial properties and investments in ASX listed property securities. The Fund was established in 1985 and has been managed by AMP Capital (“the Manager”) since January 2012 following the merger of AXA Asia Pacific with AMP. Both the Manager and the Responsible Entity (“RE”) are part of AMP Limited, a top 100 ASX listed company.
The Fund’s objective is to provide investors with income and long-term capital growth. The portfolio metrics are robust: (1) 26 properties in the office, retail and industrial sectors; (2) Weighted Average Lease Expiry (WALE) of 4.3 years; (3) 96.3% occupancy; (4) good tenant diversification with no one tenant representing more than 5% of rent income. WAPF is also the largest diversified unlisted fund available to retail investors with $2.1B of assets.
The Fund invests in direct properties (50% - 100% of assets, target >75%), cash (0% - 50% of assets, typically <5%) and ASX listed securities ( 0% - 50% of assets, typically 0% - 15%). Currently the Fund has $2.1B of assets with $1.9B (92.8%) in Direct Properties, $0.1B (5.8%) in listed securities, as well as cash and other assets.
Since 2012, the Fund has been managed by AMP Capital and has delivered an average total return of 7.9% p.a. The total return over the 5-years to June 2020 has been 6.00% p.a., below the PCA/IPD benchmark index return of 9.3% p.a. However, the total returns delivered must be seen in the context of the Fund having the lowest gearing in the unlisted fund sector (max gearing of 25% v/s sector average of over 35%). As such, the Fund’s risk/return trade- off presages a conservative management strategy albeit still delivering healthy total returns.
We note the Fund is currently paying 7.24cpu (or 1.81 cpu per quarter) for the calendar year 2020 which includes a return of capital (equivalent to 0.96 cpu). In circumstances where the income or distribution per unit would otherwise be temporarily reduced, the Fund’s distribution policy is to include a component of capital as part of the distribution. The impact of adverse events such as the pandemic has led to lower rent collections. While rent collections normalise over the next several months, the Manager aims to maintain a level of quarterly cash payments that were paid pre COVID-19. The resulting effect of this capital management initiative is to provide a more stable distribution profile but that comes at the expense of lower potential capital gains.
Core Property estimates the pre-tax equity IRR to be between 5.1% - 9.0% p.a. (midpoint 7.0% p.a.) over an estimated five-year period (see Financial Analysis section). The analysis includes the potential that investors may receive a capital gain or loss, based on market conditions, and does not include any upside from potential development opportunities.
The Fund provides monthly withdrawals. It is however important for investors to recognise that investment in property funds generally needs to be over a medium to long duration to benefit from forecast returns and for the Manager to execute on stated strategies.
Fees currently charged by the Fund are competitive and at the low end of the market.
The Fund reduces interest rate risk through a conservative gearing policy to maintain gearing below 25% (currently 18.7%), with a target to remain in the 0% - 15% range. The Loan to Valuation Ratio (LVR) of 18.3% is well below the bank LVR covenant of 50% and the Interest Coverage Ratio (ICR) is 18.7x. Both metrics provide a substantial cushion against market headwinds.