Australian Unity Sells Diversified Property Fund

After a couple of failed attempts at merging the Diversified Property Fund with other funds, Australian Unity has decided to rid itself of managing the fund by selling the management rights to ASA Real Estate Partners. I don't have any objections to this. The previous mergers would have reduced the diversification of the fund and also financially disadvantageous to existing unit holders. This sounds like an experienced team.

Bottom in Real Estate?

Fundrise have come out and said that they think the bottom is in in the commercial real estate market. Coincides with my assessment that maybe the bottom is close for a diversified portfolio. This graph shows monthly percentage returns of the TIAA Real Estate Fund and a twelve-month moving average:

So, I am switching some of my US 403b account back to the TIAA Real Estate Fund. My mistake in the last couple of years was not switching enough out of this fund to CREF Social Choice, though I did switch a lot. I was at 43% Real Estate, 57% Social Choice last month and now am at 70% Real Estate, 30% Social Choice. As a result of the switches I managed to roughly maintain the balance of the account in the last couple of years:

I was actively saving in this account up to June 2007, after which the trend is solely due to investment returns.

Second Australian Unity Merger Plan Scuttled

Australian Unity and Cromwell announce that their fund merger plan is cancelled. I wasn't very enthusiastic about the merger and so am happy it has been called off. Cromwell's fund only included offices, so while the deal was diversifying for Cromwell unitholders it was not so for Australian Unity unitholders. I invested in the fund to get diversified property exposure, not just offices.

Got a Call from Australian Unity

I blogged recently about the proposed merger between the Australian Unity Diversified Property Fund and a Cromwell office fund. Today, I was called by a representative who told me about the plan and timeline and asked if I had questions and whether I would support the proposal So, I told him that I understood the reasons for seeking a merger and that I thought this merger was better than previous proposal but also that I invested in the fund to get exposure to a diversified portfolio and now it was going to be a office dominated fund, a sector that's not doing too well. So, I wasn't really sure which way to vote. He sounded disappointed and said he understood my thinking...

New Australian Unity Merger Proposal

Australian Unity Diversified Property Fun has a new merger proposal on the table following the failed merger in 2021-22. This is a merger with the unlisted Cromwell Direct Property Fund. This seems like a fair deal unlike the previous one. It has various advantages. The only downside is that the merged fund will have 70% of its assets in offices. The attraction of AUDPF was that it was truly diversified and not dominated by offices. 

I expect I will stay in the fund (there is only a limited near term opportunity to withdraw) and think about withdrawing in 2025 when a full liquidity event is promised. The main risk is that office properties are downvalued in 2024 and 2025 after the merger happens. I am seeing a decline in value in the TIAA Real Estate Fund even though only a quarter of their assets are in offices. I reduced my holdings near peak value, should have reduced them more. So, maybe I should try to withdraw some of our investment when allowed later this year...

Domacom Reinstated to ASX Quotation

On the last trading day before Christmas, Domacom has been reinstated to quotation. I wonder where the price will end up?

7:27pm

It went up! Closing at 7 cents a share. It was last quoted at 6.5 cents before being suspended. There were more shares on the buy side than the sell side most of the day.

Regal Investment Fund Implements Resource Royalties Strategy

 

Regal Investment Fund (RF1.AX) is continuing to diversify their portfolio. Recently, they added a water strategy through Kilter Rural. Now they are adding a resource royalties strategy through the Gresham Resource Royalties Fund. While the water strategy is only 2% of the fund, the resource royalties strategy will be 17% of the fund initially. I am categorizing both of these in the real assets class. From the announcement:

"A resource royalty is a right to receive payment usuallyreflecting the value of a percentage of revenue derived from the production from a mining, oil and gas or renewable project. A commodity stream is an agreement conferring a right to purchase all or a portion of the production produced from a mining, oil and gas or renewable project at a pre-set price. Royalties and commodity streams are often used interchangeably. Royalties and commodity streams are typically acquired for an upfront payment. They can provide investors with the upside potential of increased commodity prices, increased production and extended mineral reserves (and sometimes new discoveries) with no or limited exposure to variable operating costs and future capital calls to fund exploration or other capital costs."

Superannuation Performance Update

 

I just calculated the return on my TIAA-CREF 403b in Australian Dollar terms to compare to our Australian superannuation funds. While the SMSF has done a lot better than Unisuper and PSS(AP) since inception, TIAA has really shone. This is mainly due to our investment in the TIAA Real Estate Fund and partly due to the fall in the Australian Dollar. Now, I am wondering whether to switch out of that fund.

Pre-tax returns for the 2021-22 financial year were: SMSF 2.6%, Unisuper -5.0%, PSS(AP) -2.9%, TIAA-CREF 28.5%. I am very generous in estimating the tax paid by Unisuper and PSS(AP). This boosts estimated pre-tax returns on the way up a little but detracts a bit on the way down.

How I Made AUD 2,900 Instantly

A couple of days ago, I went on the Domacom platform just to see if anything was new. I found an offer to sell about 10,000 units in a semi-rural property near Sydney for AUD 1.0156 placed on 30th May. But the property was revalued on 18th July by around 30%!. Almost instantly I bought the units. One downside is that I already own about AUD 10k of units in the neighboring property. Of course, I can't realize this profit, so it is just on paper. The market is very illiquid, which is why I managed to get this bargain in the first place. Both properties have a vote next March on whether to sell the properties and wind up the funds or whether to continue to hold. Recently, my first investment at Domacom held a vote and sold for a big profit.

 

To get the funds, I had to cancel my pledge to a campaign to buy rural property. My money has been tied up in the campaign for a year while they have made almost no progress on raising money. I think that in future I won't make pledges to campaigns and only engage in the secondary market. The additional advantage of that is that I avoid paying big fees for the purchase of the property and the often huge upfront cut (c. 10%) taken by the promoters of the campaign. It would be much better if they were paid by performance fees instead...

Some Good Financial News

  

Masterworks sold Lured by Cecily Brown for USD 1 million. The initial offer price was USD 605k. We are supposed to get the money within a month. I think this is the third painting they have sold, two of which were ones I invested in. 

Domacom reported to the ASX that their private placement was over-subscribed! They hope to be reintstated in the ASX soon.

Got Out of URF

After reading the most recent quarterly report I decided to get out of URF. I'm not optimistic that even if the shareholders vote against the sale deal we will eventually realize more for the investment and there is a big risk it is approved and we get less than the current market price. I exited yesterday and today at 27 cents per share for a net loss on the investment of AUD 2,300, which isn't too bad, I guess. Obivously, there are a lot of people thinking differently to me who want to buy in.

Two New Investments

 I invested in another painting at Masterworks, No Hopeless by Yoshitomo Nara:

This takes my investment back up to 12 paintings again, given that Doppelbild by Albert Oehlen was sold and should pay out soon. I was a bit nervous this was overvalued but after a bit of research took the plunge anyway and invested USD 10k.

I also started buying units in a property on Domacom: 60 Devonshire Road, Rossmore, which is a market garden near the planned Badgery's Creek Airport. After the initial investors paid up big fees for the establishment of the investment, it trades below par but at the last valuation saw an uptick in value. I am thinking now it makes more sense to buy in the secondary market on Domacom instead of joining "campaigns" that seem to go nowhere. 

So far, I only invested AUD 920, but have a bid open waiting for sellers.

Domacom Appoints New Chairman and CEO

Good news at Domacom (DCL.AX). They announced today that they have appointed John Hewson as chairman and John Elkovich as the new CEO. Hewson is chairman of Crescent Finance who are collaborating with Domacom on Islamic mortgages. Domacom has interesting products but has struggled to get enough funds under management to breakeven. They need 5-10 times as much FUM to become profitable. So, though they have seen nice growth in FUM recently, 40% p.a. growth just doesn't move the needle that quickly. My hope has been that the company would be acquired. It's good to see that some other experienced people believe in the product.

I can see scope for improving the fractional investing product. I find the financial information provided on existing investments to be unclear and non-transparent. The level of explanation really needs to be stepped up to make secondary investors willing to participate and increase market liquidity in my opinion. I have only invested in one secondary investment, which is now exiting. I signed up to several "campaigns" but there is glacial progress on raising funds for them. I just discovered that two of them seem to have given up and released the pledged cash back to investors.

Hopefully, these things will improve going forward. Maybe I should send the new chairman (who is my honorary colleague) a letter with my thoughts :)

URF Selling Property Portfolio

The U.S. Masters Residential Property Fund (URF.AX) announced they are selling their property portfolio at a discount. As a result, they will pay out URFPA holders at the AUD 100 face value of the units, but ordinary equity owners of URF.AX will only get 22 cents per unit.

I didn't manage to get out in the initial auction and the price is now at 20 cents. I am down AUD 25k for this month and a AUD 15k loss overall at this point. This is my 5th worst trade or investment ever at this point.

However, this is a 10% return from here and so I guess I will hold for the moment. That will turn it into the 10th or 11th worst investment.

This was always a speculative investment and so I didn't invest too much in it. It represented 1.36% of net worth not including our house prior to this announcement. However, there are still some lessons to be learned:

1. When they recently said that they were likely going to sell the portfolio at a discount I should have sold then.

2. I should have invested in the URFPA units all along. I was put off investing in them because of their complicated structure/conditions. But they were safer than URF.AX and had a lot of potential upside.

3. There's often a good reason why the market seems to undervalue an investment. Turns out it didn't undervalue it enough, though!

4. Still, the 5th and 10th best investments have made roughly 10 times what this has lost at the moment.

In other bad news, Domacom settled the dispute for only AUD 2.5 million. That will only last them 6 months...

Update on TIAA Real Estate Fund

Back in May, I predicted that the TIAA Real Estate Fund would perform well and shifted almost all my US retirement account into it. Well, it has done exactly that:

Since May it has gained 14.4%, while the Social Choice fund gained only 1.3%! I wish all my predictions were this good and I hadn't left anything in the Social Choice fund. The question now is when to start switching back again.

Australian Unity Merger Terminated

Australian Unity Office Fund (AOF.AX) announced that the merger with the Australian Unity Diversified Fund has been cancelled. It's odd that it is large shareholders of the listed fund who scuppered the deal when I thought the merger was disadvantageous to the unlisted fund members.

Australian Unity Merger Deferred

 

Australian Office Fund (AOF.AX) announces that the merger meeting is delayed till at least February because some large shareholders gave negative feedback on the proposal. That's strange because I thought the merger unfairly benefited AOF shareholders! Anyway, we will have to wait and see what changes are made or if the whole thing is cancelled in the end.

Update on Australian Office Fund / Australian Unity Diversified Property Fund Merger

I have been planning to vote no on this merger for a number of reasons. The explanatory booklet for the merger has been released to the ASX. This provides details on the options to exist the fund. Though the unitholder meeting will be on 10 December, we have to decide by 8 December whether we want to exit the fund. However, we can choose to withdraw only if the merger goes ahead, so that is OK.

They are also offering to redeem a minimum of AUD 24.8 million of units if people want to redeem that much and maybe more than that if the merger is approved. If the merger isn't approved the cap will be at AUD 8.6 million. So, I plan to submit a withdrawal notice now and vote no. My guess is that only part of our investment will be redeemed if the merger doesn't go through. Anyway, we could always apply for more units again if we really wanted to in that case.

After reading all these details I am happier than I was about the proposal, but really would have preferred if they raised more capital instead. I would have been happy to invest in more units.

Investments Review: Part 6, Real Assets

In my usual reporting, gold is a separate category from real assets. I plan to put 10% of gross assets into gold and 15% into real assets. 10% would be in real estate and 5% in other assets, such as art.

Gold (PMGOLD.AX). Share of net worth: 12.10%. IRR: 15.2%. This is one of the more cost and tax effective ways to hold gold. The fund reflects rights to gold held by the Perth Mint. This is much more tax effective than using futures and less hassle than owning real gold, though Perth Mint provide some fairly easy options there. The IRR reflects our total gains on gold ETFs. The management fee is taken by the manager cancelling some shares each year. That means the price exactly tracks the Australian Dollar price of 1/100 of an ounce of gold.

WAM Alternatives (WMA.AX). Share of net worth: 4.32%. IRR: 16.9%. About 10% of this fund is in real estate and half in real assets, mainly water rights. The rest is in venture capital and cash. This fund was started by the failed Bluesky group and has now been taken over by Wilson Asset Management. The fund has traded deep below NAV. It has closed some of the gap but is still below NAV. I'm holding the fund mainly in the hope that eventually it trades at a premium to NAV. The underlying performance is not that good. In 2020 it lost 3 cents per share in NAV to $1.08 per share while paying out 4 cents in dividends. This year, so far it's gained 6 cents per share, which I guess is OK.

TIAA Real Estate. Share of net worth: 2.78%. IRR: 4.8%. This fund invests in US real estate - offices, retail, apartments, and industrial. It is in my US retirement account (403b). The IRR for this fund is low, but its returns are very smoothed and so it has a nominally high Sharpe ratio and a low correlation to my other assets. Based on my analysis, I'm hoping that the coming period is one of higher returns than average for this fund. It is easy to market time this fund due to the lag in revaluations.

Masterworks. Share of net worth: 2.63%. IRR: -0.28%. This fund provides fractional access to paintings, mostly works from the last few decades. I have now invested in nine paintings through the platform, investing USD 10k in each. Not much to report so far regarding performance. The downside of the platform I think, is that it isn't worthwhile for the manager to buy a painting for $100k or even $1 million. Buying a $10 million painting has a huge economy of scale for them. They are incentivised to make profits, but they could make it either by getting a lot of appreciation or less appreciation but more assets under management faster. Less expensive paintings that have a larger potential for gain cost them too much to offer.

US Masters Residential Property Fund (URF.AX). Share of net worth: 1.25%. IRR: -1.85%.This is an Australian fund that invests in residential real estate in metropolitan New York. The fund has had a quite disastrous history and now trades at less than 50% of NAV. The fund's underlying exposure to real estate is much larger than the value of the shares on the ASX. The fund has stabilized after refinancing its debt. Previously, it had assets in US Dollars and a lot of debt in Australian Dollars. My bet is that house prices rise in the New York area, that fund costs are now lower after the restructuring, and that the fund eventually trades nearer NAV.

Australian Unity Diversified Fund. Share of net worth: 1.17%. IRR: 28.2%. A recent investment in our SMSF. Invests in Australian office, retail, and healthcare real estate. This is unlisted property and so the price reflects the actual net asset value. Listed real estate provides much less diversification from stock market risk.

Domacom Investments. Share of net worth: 1.12%. IRR: 0.16%. Another recent investment in our SMSF. Fractional investing in Australian real estate. So far, I bought a small share in a farm, but the platform is very slow moving regarding new investments and most existing investments that are trading don't look like good bets.

TIAA Real Estate Fund

I haven't gotten around to reviewing the TIAA Real Estate Fund yet, but have decided to buy more of it. There are two reasons. First, after reviewing the CREF Social Choice Fund, I'm a bit concerned that it is 40% bonds even though it has been a pretty decent fund relative to benchmarks. Second, it looks like timing is good to switch into TIAA Real Estate. The following chart shows its monthly returns and a 12 month moving average:

The fund does well after recessions but with a lag compared to the stock market. The moving average has just turned the corner again and monthly returns are above anything seen in recent years. In March I switched out of this fund as I was worried about the pandemic and into Social Choice and Money Market. Then in December I switched back into Real Estate. Now I just switched most of my remaining holding of Social Choice.