In the latest Meet the Managers profile, Money Management speaks to Quay Global Investors co-founder and co-portfolio manager Justin Blaess.
Justin Blaess is co-founder and portfolio manager at Quay Global Investors. His firm was recognised for its expertise in listed global real estate, winning this year’s Global Property Securities Fund of the Year at the 25th Money Management Fund Manager of the Year awards.
Blaess has an extensive background in investment management, investment banking and equities research. Before co-founding Quay, was part of Deutsche Bank’s investment banking team in Australia, where he was involved in international real estate transactions.
His real estate experience also extends to prior roles at Merrill Lynch, and at ING Investment Management where he was responsible for the portfolio management of all its listed real estate strategies – more than $2bn of assets under management. During this period, he delivered peer-leading returns which were recognised by various industry awards.
Quay runs a highly concentrated and low turnover portfolio with around $600 million under management and currently holds around 24 listed securities. The fund provides access to a variety of listed real estate opportunities across multiple geographies and aims to consistently deliver attractive total returns over the long term.
Read on as Blaess discusses investing in global real estate, his approach to risk management and geopolitical risks affecting real estate.
Money Management (MM): You’re concentrated inside of listed global real estate. A lot of people would ask: why global real estate?
Justin Blaess, Quay (JB): Take a step back and think: what are you anchored by? You’re anchored by tangible assets, by some of the best property in the world. For example, the Empire State Building. It was there nearly 100 years ago, producing income, and it’s there today, producing income. I’m not sure you’ll say the same about Facebook in a hundred years. You don’t suffer as much from creative disruption in global real estate.
If you invest in good real estate that remains productive, and requires minimal capital expenditure to keep it productive, then you can generate fantastic long term returns.
Our job is to manage balance sheet risk, and agency/management risk. If we do that effectively, then we can then we can deliver attractive long term total returns. If you look at the long-term returns for the index, it’s better than global equities over the last 20-30 years.
And because you’re anchored by those tangible assets, global real estate delivers competitive total returns with lower risk in the long term than the broader equities sector as well.
MM: Real estate is a sector that’s been impacted by the COVID pandemic, conflicts in Europe, supply chain constraints, rising interest rates and falling valuations. Is this something that keeps you awake at night or have you got a way to manage it?
JB: We look for sectors that are backed by long-term secular themes that, regardless of where the cycle goes, will continue to drive earnings.
Not all real estate was disrupted by COVID. Some sectors did really well – life science offices and data centres, for example. On the other end of the spectrum, retail, senior housing, and student accommodation were very much disrupted.
Take senior housing. You had occupancy rates decline, and the costs of running the centres go up. Supply stopped because no-one wanted to build a new senior housing centre in the US or Canada when you had COVID raging. Share prices fell a lot.
However, that’s created opportunity today. You’ve got a wave of baby boomers about to move into the space, you’ve got supply at decade lows and strongly-growing rents. That’s what we look for.
MM: What is your approach to risk management?
JB: The reality is that stocks don’t go up all the time, and they do take a breather for one reason or the other.
So, our approach to risk management is don’t lose money. How do we define that? It’s not so much about trying to pick short term share price movements, but about investing in asset classes which have good, long-term secular themes. It’s about investing in management that has a good track record and good governance. It’s about investing in entities that are sensibly geared and have sensibly structured balance sheets.
For us, risk is all in the cash flows, and that’s where our focus is. We have other nuances. We don’t invest in diversified markets, and we don’t invest in property developers or real estate fund managers.
We also make sure there’s adequate daily liquidity for what we invest in, such that if we need to get out, we can.
MM: Is there any particular reason why you channel your strategy towards global markets?
JB: It’s a large universe. The Australian A-REIT market is around $120 billion. The listed global real estate universe is $3 trillion. And in global real estate, the top ten stocks make up about 25 per cent of that universe, whereas for Australian A-REITs, the top 10 make up about 85 per cent. And within that $3 trillion in market cap, you have a lot of constituents, and a vast array of sectors.
Also, you have more choice within sectors. You do have access to some of the alternate sectors in Australia, like storage, but you might only have one stock per sector. In the global market, you have a handful to choose from per sector and you get to pick based on the best management team, the best balance sheets, and the most focused strategy.
MM: How do you know when it’s time to trade out when you see geopolitical risks and other circumstances developing?
JB: The way we think about it, if we understand the businesses that we’re investing in well enough, we can assess the risks from changing factors and decide whether we can sleep at night or we have to do something about it.
We had a reasonable position in German residential. The cost of heating apartments in Germany in winter was forecast to be quite high due to the Ukraine War, and that had a negative impact on the share price of our investment.
In that case, we didn’t sell out, because we saw an incredibly reliable and safe cash flow. They’re affordable apartments – essentially post-war blocks that have been renovated. They rent at a third of the price of new apartments and there’s huge demand for them. What’s more, with all the Ukrainian refugees coming in, there’s even more demand. And because of the social-leaning nature of the German government, if someone can’t pay their rent, then the government pays it for them. So we see an incredibly reliable and safe cash flow. The Ukraine war wasn’t something that made us want to sell German apartments. If anything, it increased the attractiveness of the fundamentals.
A case where we did couldn’t sleep at night was when COVID hit, and we were invested student accommodation in the UK. It was pretty obvious that the universities were going to shut down. There weren’t going to be any students to rent beds in student accommodation. In that case, we exited our holding. We got back into a few months later when it became apparent that we’d reached the low.
To listen the full interview with Justin Blaess and a range of other experts, you can access the Relative Return podcast here.
