The Marriott Property Income Fund has as its primary objective long term growth in dividend (or rental) income and hence capital. To achieve this objective, apart from liquid assets, securities normally to be included in the portfolio will be financially sound listed property shares, collective investment schemes in property and property loan stock. The portfolio will consist of a carefully selected spread of prime listed commercial and industrial property securities of at least 85% of the market value of the portfolio.

The Marriott Property Equity Fund produced a total return of 4.0% for the 12 months ending 31 December 2019.

The fund has a 70% exposure to listed property. The Marriott Property Equity Fund was able to shield investors from several REITs that were perceived to be high-yielding at the start of 2019 but failed to deliver on that yield (many of which cut dividends from 20% to 100%). Investors in these stocks would have also experienced capital losses & lower risk-adjusted total returns. Some of these stocks are shown in the table below:

REIT Opening Forward Yield (2019) Dividend Cut (2019) Total Return (2019) Delta Property Fund 21% -69% -78% Rebosis B 20% -100% -88% Accelerate Property Fund 16% -29% -45% Rebosis A 14% -100% -79% Fortress B 13% -13% -34% Dipula B 12% -17% -43%

In contrast to the above, the opening forward yield in 2019 of the Marriott Property Equity Fund was 7.4% & the average dividend growth that the underlying stocks in the fund produced over the year was 4.2%. High yielding stocks are only great if the dividend paid by the underlying companies are secure & sustainable – which was not the case with the above listed stocks.

SA property fundamentals further deteriorated in 2019 as evidenced by subdued rental income growth, negative reversions & shorter lease terms with lower contractual escalations being reported by REITs. The market has largely been a “tenants market” with landlords having to increase lease incentives to persuade tenants to stay & avoid costs associated with re-letting space as well as the risk of void periods. Operating costs outpaced rental income growth, driven mainly by municipal charges (the largest cost contributor) which grew at 7.2% for the year according to the latest SAPOA cost report. These fundamentals have eroded earnings & as a result REITs have continued to combat this by expanding into offshore markets where economic growth prospects are much better and funding costs are cheaper.

In addition, these operating conditions have also placed downward pressure on property valuations, as evidenced by many write-downs of asset values & property investments in 2019. The latest SAPOA Cap & Discount Rate Report showed that property cap rates moved out by about 30bps over the last 6 months. The risk of further write-downs in 2020 appears likely given the headwinds that the sector faces coupled with the lack of transactional evidence to support current valuations. Management teams have responded to this by selling non-core assets to deleverage constrained balance sheets & improve core assets. Unsustainably high dividend pay-out ratios have been rebased downward to more sustainable levels & the contribution of non-recurring/once-off items to earnings have been reducing. These are positive developments within the sector which will allow for more investment by REITs into improving the quality of their properties, which is needed to achieve more sustainable rental income growth going forward.

The Marriott Property Equity Fund continues to invest in what we consider to be the highest quality, most liquid REITs. These companies have strong management teams, transparent disclosure, minimal once-off earnings and the most secure dividend outlook in our opinion. We believe that these companies are best positioned to deliver sustainable growing dividends over the long term. With respect to the remaining 30% of the fund, investors have been well served by the decision to take advantage of attractive 5-year negotiable fixed deposit yields and floating corporate debt.