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Welcome back to the Rated Change with York Wealth Management. As advices to some of the

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wealthiest families in the country, the Rated Change is a podcast designed to help you in

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the pursuit of building long term wealth through the insights of some of the brightest minds

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in asset management. I'm your host Murdoch Gatty and today's broadcast

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we're speaking with Joss Engerbretsen, portfolio manager at Barwon Investment Partners and

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he oversees the Barwon Disability Accommodation Fund. If you have any loved ones with special

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disability accommodation needs or you've been following the SDA and NDIS news from the government,

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then I think you're really going to benefit from the insights Joss has to share on these

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areas. For people unfamiliar with these schemes, Joss unpacks exactly what is the National

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Disability Insurance Scheme and the specialist disability accommodation. He shares his thoughts

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on what improvements should be implemented in these schemes, what risks to avoid when

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investing in this space and how they are investing in specialist disability accommodation, which

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is both favorable for their clients and investors. The funds been around now for two years, has

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a five year lock in the fund targets a total return of eight to 10% comprising of an income

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distribution yield of five to 7%. The fund for the past 12 months has returned 14% with

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4.85% of that being an income yield and 9% capital growth.

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Before we get into the podcast, I'd also like to encourage you to listen to this glamour

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at the end of the broadcast and to feed keep your feedback coming. You can reach me at

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mgatty at ywm.com.au. So with that being said, I hope you enjoy this conversation as much

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as I did. So sit back, relax and enjoy it.

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Joss Ingerbretson, welcome to the rate of change with York Wealth Management.

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James Murdoch, thanks very much for having me here today.

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Good to have you on. So who is Joss and how did you get into financial markets?

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Sure. Well, I'm the portfolio manager for Barland's Disability Accommodation Fund. I

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have a pretty squiggly path into financial markets, which is probably a little bit less

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conventional than most that find their way into funds management. So I started out, go

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firstly, going to uni at Sydney University doing a combination of civil engineering and

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economics. And so actually was a civil engineer for a number of years outside of uni, got

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more interested in the commercial side of real estate development and the real estate

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game. And so actually moved transitioned across into more of a development management style

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of role. So the commercial manager for real estate projects. But I moved across to a group

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called Ingenier Communities, which many would be familiar with on the podcast nowadays,

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but back then it's a much smaller organisation starting out developing what's now called

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land lease communities or what we used to call manufactured home estates, which is,

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was effectively a new form of retirement living to challenge the incumbent deferred management

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fee model or rental retirement model. And that sector has grown quite substantially

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over time. And I saw it from both my time at Ingenier and then moved on to another ASX

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listed group called Aspen Living Villages. And was with both those organisations as you

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know, cap rates in that sector came down from circa 10, 11% right down to around about five

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and a half percent where they are now. So I was quite involved in seeing how that new

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sector formed up as well as other adjacent sectors as well that both of those companies

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worked in, which was caravan parks and FIFO mining camps and things of that nature. So

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alternative style residential accommodation. And then subsequently went on to be the head

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of property for a major telco and infrastructure business called BAI Communications, which

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provides all the backhaul infrastructure for ABC, SBS and Channel 10. And then went and

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actually studied my Masters of Applied Finance at Macquarie University and got more interested

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in the kind of financial markets or funds management side of real estate and moved across

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to Barwon just over two years ago after a prolonged study of the SDA market and how

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it was shaping up and came across Barwon who had actually just themselves launched a fund

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in the specialist disability accommodation sector, which I work in now and decided to

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join forces to build an institutional grade funds management response to the specialist

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disability accommodation sector. So we've been investing in SDA for just over two years,

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two and a half years now, and we've got a fund that's looking to be around about 80

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million of GAV. And so that's how I find myself here today.

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Yeah, that's an interesting path. They always say that the best person to essentially run

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a factory is the person that's worked on the floor, right? Not just the manager coming

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in over top, but that sounds like the path that you've had.

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Yeah, it's been an interesting one. I mean, when I set out on my career, I always had

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that more commercial interest to me, you know, whilst, you know, doing civil engineering

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design for large master planning communities and other projects was, you know, really interesting.

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You know, I found that I was drawn more towards the commercial management side. And I think

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the ultimate evolution of that is being very close to where the capital comes from and

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being able to actually, you know, understand from the bottom up, like we're allocating

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capital, particularly in physical asset class, like real estate, you know, you've got to

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understand how these projects actually come together, what's actually going to work for

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the end user of those different types of real estate to be able to allocate capital well.

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So it's been a bit of a strange path, but I've been able to bring and adopt learnings

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across the technical front end through the project management development management

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side and now apply them, you know, as a fund manager in the real estate space.

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Yeah, I think it's you might have a for our listeners, a very interesting insight from

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like, I suppose, the three main vantage points or where this interests a lot of Australians,

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which is, you know, if you look, if you have a loved one or you are yourself, you know,

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having, you know, a dwelling, you know, in the SDA framework, or, you know, the government

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stepping in, you know, providing a funding framework to actually get these things built.

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And then secondly, so thirdly, the developers themselves, you know, seeking out to, you

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know, build these properties.

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And obviously, no one does anything without trying to make profit.

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But, you know, there's always the good, the bad, the ugly inside that.

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But I would love to hear your thoughts on, you know, how the, well, essentially the community

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within this particular asset class operates.

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Yeah, well, for the listeners that might not be so familiar with exactly what the specialist

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disability accommodation space is, I mean, it's a relatively new sector.

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It's really genuinely only five years old.

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So it's still as a sector growing, growing quite rapidly, but still finding its feet.

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And at the end of the day, it's purpose-built accommodation for people with severe and permanent

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disabilities that have very high support needs or, you know, a great degree of functional

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impairment.

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So it's for the very top kind of circus, 6% of lower functionality under the NDIS.

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And it's brought about by a rental stream that was created out of the NDIS, which is

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to incentivise the private market to build out this new dwelling category or residential

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asset class.

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And so, you know, it's very much, you know, caters towards people with quite severe disabilities,

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but also, you know, you've got to take into account their families that are helping them

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make those decisions.

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But also, because these residents do have a high degree of functional impairment, they've

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actually also need daily care.

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So you've also got to think about how is that real estate offering providing a safe work

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environment?

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Making sure that that piece of real estate is near local amenities that carers can go

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and get a coffee or a sandwich at lunch.

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And of course, you know, we've got, you know, it being a very new sector, you know, being

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only five years old, there's only about 6,500 places or 6,500 beds built to date.

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And from the current metrics of how many need it, that's about 22,000, 23,000 kind of need

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it now today or have eligible funding.

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So we need to be incentivizing and working with developers to create, you know, viable,

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profitable projects that they want to go out there and do the hard work to find the land

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and actually build this product and build a good product for us who are going to ultimately

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own it over the long term.

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So there's a number of different stakeholders in this space that you have to think about.

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You've of course got to think about like any business and any real estate play, the end

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user, and that's our, you know, customer centric focus here on the participant and making sure

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that we enable as an independently independent and inclusive life as possible.

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The carers and making sure that that that property sits within an area that can be easily

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serviced with care.

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We've also got the developers that we need to take care of here.

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So you've got to actually think about, you know, multiple different components of how

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to bring together an SDA property, which is good because I've kind of worn a few of those

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hats in the past and it just helps you triangulate that.

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So with, you were saying the other day that they had the SDA price guide review, right,

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which happens, what was it, every five years?

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Is that correct?

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Yeah, that's correct.

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So with that, do you mind giving just an overview of the universe?

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Because this has been up and running for five years and if anyone's been reading the headlines,

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you probably see headlines such as NDIS on track for a $5.7 billion budget blowout, you

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know, changes to the SDA scheme to, you know, hopefully improve this.

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And I think I was trying to someone the other day that made a comment that potentially if

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it continues on this course, this might, this particular scheme may become the single largest

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cost to Australians and the taxpayers going forward.

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So do you mind giving, fleshing out what are the real numbers, what's actually happening

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within the scheme?

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And you also said that you helped, you know, make some suggestions on changes with that

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particular review and some were adopted.

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So I'd be really interested in a year.

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Yeah, well, that's quite a big set of questions to unpack.

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But maybe if we just take it back to the beginning of, you know, what is the NDIS?

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Because I think a lot of people's association with the NDIS is about budget blowouts and

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that's much of the rhetoric that we do see in the paper.

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But let's maybe just take a little bit of a time machine back in time to why it even

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exists in the first place.

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So back in 2009, in that kind of era of the Gillard government, it was identified that

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we weren't funding care services in this country very well for those with a disability.

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And so they did a number of investigations, found out, you know, the money is kind of

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going to waste or not being used effectively on just actually not getting good outcomes

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for those vulnerable members of our society.

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And so they went and they said, look, let's actually flip the whole thing on its head.

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Let's turn it into a market based system.

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So effectively, people who have severe and permanent disabilities, who may be eligible

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for this new thing called the NDIS will do an assessment of their particular functional

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requirements, their level of disability, and will assign them a package of funding that

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they get to use to approach the market.

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So it very much turned it from, you know, the whole system on its head to a market based

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system where a participant could go and find the care services that suited their particular

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disability and to create greater choice and control.

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And that was, you know, really started being rolled out in around about 2011 and then really

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started going across the country in 2013.

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And so jump forward 10 years to where we are now.

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And we have 550,000 Australians who have a severe and permanent disability.

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Just remembering for a second, there's actually 4.3 million Australians that have some form

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of disability, but the NDIS is designed for the 550,000 who are deemed to have permanent

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and severe disabilities.

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And that 550,000 of people out there getting, you know, daily care, getting daily activities

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or receiving things like SDA, that directly employs, you know, estimates of around 270,000

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Australians and indirectly many, many more.

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So, you know, it's a pretty big part of the employment and the economy at the moment.

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The last 12 months, I think the expenditure was around 34 billion or kind of in that number,

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which is obviously a pretty big number.

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And that's about one and a half percent of GDP, one to one and a half percent of GDP.

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And so if you look at what's going to happen over the next kind of 10 years, the estimates

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at the moment, which is, you know, very much what people are alerted to, is that's growing

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to about 90 billion a year, and which is around about two and a half percent of GDP.

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And to give you a sense of relative scale, that's around about the same size of the agricultural

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industry.

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So, yes, it's a huge cost, but it also is a huge employer.

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And there's actually a lot of GDP that comes out of that as well, both, you know, the direct

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spend, but then the follow on indirect spend as well to all the support services that sit

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around to members who participate in that part of the economy.

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So yeah, look, the concern is from many people, you know, we're concerned about what, you

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know, what the budget is and how it's growing.

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However, what affects us in this specialist disability accommodation world isn't necessarily

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the overall budget, but it's actually the line item of SDA.

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So SDA is just a line item in the budget.

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It was created in circa, you know, 2015, 2016.

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They identified that the NDIS was doing a really good job in terms of creating a market

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based system for delivering high quality services to participants.

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They're seeing a lot of great outcomes of the NDIS and they, but what was happening

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is there was still about eight and a half thousand people kind of under the age of 55

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in residential aged care, which is, you know, designed for people in their 80s who, you

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know, might be in their last series of life.

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There was a whole bunch of people stuck in community housing stock.

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There was a whole bunch of people, you know, stuck in government housing that hadn't,

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that wasn't modified for their needs.

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And so they created this new line item of SDA.

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And as at today and kind of still from the beginning of this game, that was, that budget

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is around 700 million per year.

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But as a sector in SDA over the last kind of 12 months, we're collecting about 230 million

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of that.

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So the 230 million, that is the SDA amount within the NDIS is actually less than 1% of

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the overall budget.

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And even if we were to be claiming the full amount, we're still kind of less than 2% of

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the overall NDIS budget.

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And I think that's really important for people to reflect on, particularly when thinking

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about investing in the specialist disability accommodation sector, because we're such a

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small part of the overall budget, but also our residents is catered to those most in

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need, the most severe disabilities.

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And so if the government were to provide sustainability measures, which they will over time, much like

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they do, you know, most government programs when they get up and running, is we don't

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think they will get much of an efficiency dividend by taking on the smallest part of

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the overall NDIS scheme, which is actually for the most severe impacted by their disabilities

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as well.

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So a vast majority of that NDIS budget is around the daily provision of care and supporting

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the 550,000 Australians, not necessarily the SDA component.

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And I'm sure there'll be sustainability measures over time.

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But when you look through to the rhetoric is both sides of the political divide or the

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aisle do actually support the NDIS.

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There's no talk of wholesale scrapping of the NDIS.

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But when you look through to actually what's being said, it's they're saying we want to

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make it sustainable for those who it was originally intended for.

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And everyone can see the benefits that the NDIS delivers.

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So you know, what does that look like?

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What does that mean?

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Well, we just see some slightly heightening of the barrier to get into the NDIS and maybe

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some some funding tweaks around the edges.

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But you know, for those particularly in SDA part of the cohort, we think, you know, that

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part of the NDIS will continue on as is.

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Okay.

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So and then with the review, what were the suggestions that you made and that was taken

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on board?

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Yeah, sorry, I didn't touch on that.

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So the SDA price guide review.

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So just to give people context, SDA is increased each year by CPI.

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So the rents to the sector are inflation hedged in that way.

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So each year since 2017, when the scheme first came into existence, we had CPI increases,

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which is linked to the March CPI.

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And each year, each of those five years, we had an increase.

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And then every fifth year, it's written into the scheme or the regulation that the government

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undertakes what's called the SDA pricing or price guide review to basically check off

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the escalation in land and build prices versus the broader CPI basket.

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And so those on the call or listening to the podcast today might be familiar with how much

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land and building construction prices have increased over the last five years.

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And it was substantially more than the broader CPI bucket.

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So they go away and they undertake a number of investigations into land and building prices.

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I think they employed Ernst and Young to help them out with that and do a number of technical

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reports.

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They also engage quite broadly with the industry at large.

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So everything from developers to fund managers like myself to SDA providers who actually

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manage the day to day tenancies of the properties.

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And they do a really broad sweep of the market to understand what's working and what's not

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on top of just the prices that need to be set at such a level to continue to encourage

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supply.

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And as part of that process, we here at Barwin did submit a discussion paper to the NDI just

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to say, hey, look, from a fund manager's perspective, this is what we're finding hard for us.

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This is what is working well.

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And here's a number of recommendations that we would make if you were, you know, as part

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of this process to make it easier for everyone.

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And so fortunately, a number of those recommendations did make it their way in there.

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This was things like, you know, clarification or consideration of how GST is considered

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in the terms of building these things and selling these things.

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There was a little bit of ambiguity around that.

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Making sure that CPI, when it does index, goes up on the 1st of July.

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So what used to happen is you would have your rents go up for the sector that actually wouldn't

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flow through to your asset until the individual participants plan renewed.

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And that wouldn't necessarily be on 1 July.

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That might be in November, December or March next year.

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Making sure that there was more clarity around the participant demand and supply data or

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the dwelling demand and supply data.

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But also ensuring that there was a lower margin or a narrower spread between different levels

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of funding packages.

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And so I'll just dwell there for a moment.

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So in the NDIS or under SDA, there's actually four funding packages, depending on your level

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of functional impairment or level of support need.

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And so I won't go into all four, but in essence, what used to happen between the highest funded

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package and the lowest funded package was about 50-55%.

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And so when you think about building one of these properties or buying one of these properties,

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if you've got to buy the land, it's probably the same, whether it's the highest funded

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person or the lowest funded participant.

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When you think about the broader structure of the building, it's broadly the same.

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When you actually got down to it, there's probably a 15 to 20% difference.

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And so that kind of 55% difference in income didn't really make a whole bunch of sense

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to a lot of us in the industry.

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So look, a lot of us must have put forward the same kind of suggestions, but they brought

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that narrowing of the highest to the lowest funded down to about 8%.

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And that kind of had two major impacts on the sector, or at least our portfolio.

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One it de-risked the assets that we already had.

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So we had a large number of our people in our portfolio were on that high funded rate.

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And so there was always a possibility you might lose some of the high funded category

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and then replace that with some of the lower funded category.

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So it de-risked the portfolio from that income reversion perspective.

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But going forward and working with developers, we would always have this tension between

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that we might build it, you know, expecting the highest funded participants to come to

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the property, but that actually might not eventuate and we might only be able to attract

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lower funded participants.

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So there was always this expectation difference around what the revenues of an asset might

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be.

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Well, bringing those substantially closer together made those conversations a lot easier

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now to the point where we're working with developers and they're saying, oh, we're

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happy to underwrite it just at the lower funded participant level.

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And if you're able to get high funded participants there over the long term, then that's okay,

299
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but it still works for us at the lower funded level, which makes it much easier to bring

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on more supply to the market.

301
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And thirdly, from kind of a social perspective, it's now nicer to be able to offer our stock

302
00:23:31,860 --> 00:23:35,620
to a much wider range of participants because we don't have that, I guess, that tension

303
00:23:35,620 --> 00:23:41,260
around the level of funding gap that was previously there.

304
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Thanks for that.

305
00:23:42,260 --> 00:23:44,980
So that's the overview and the space.

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00:23:44,980 --> 00:23:47,260
What's actually the strategy of Barwan?

307
00:23:47,260 --> 00:23:51,020
Because a number of people will be reading, you probably see it over social media, you

308
00:23:51,020 --> 00:23:52,020
know, there's a number of people out there.

309
00:23:52,020 --> 00:23:55,460
I get clients emailing me going, hey, there's this new NDIS scheme.

310
00:23:55,460 --> 00:24:02,060
It's making 15% or higher, you know, but I'm concerned that it's in the middle of nowhere.

311
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Is this actually a good idea?

312
00:24:03,420 --> 00:24:05,500
What do you think?

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00:24:05,500 --> 00:24:14,900
What in your opinion, running this strategy and what return should people be expecting

314
00:24:14,900 --> 00:24:19,740
from your portfolio or from these assets and where should these assets be located?

315
00:24:19,740 --> 00:24:25,540
Yeah, well, I'll probably touch on, you know, who Barwan is and how we found our way to

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00:24:25,540 --> 00:24:27,380
this space.

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00:24:27,380 --> 00:24:33,740
So Barwan is an institutional grade independent fund manager based in Sydney, but with offices

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in Brisbane and Melbourne as well.

319
00:24:36,900 --> 00:24:44,300
We were set up in around about 2006 by the former head of alternatives at Macquarie Bank,

320
00:24:44,300 --> 00:24:50,580
Sam Armstrong, and the former head of real estate at AMP Capital, Rob Morrison, and joined

321
00:24:50,580 --> 00:24:52,940
by their third partner, Peter Connors.

322
00:24:52,940 --> 00:24:58,140
And so we've been investing on behalf of institutional grade groups.

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So you know, predominantly super funds, other institutional groups and high net worths since

324
00:25:04,100 --> 00:25:05,100
that time.

325
00:25:05,100 --> 00:25:11,100
And today the business has got over 50 people and we managed over 3 billion of capital on

326
00:25:11,100 --> 00:25:15,020
behalf of our institutional or highly sophisticated clients.

327
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We're wholesale or institutional only.

328
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And I think that's quite important.

329
00:25:22,660 --> 00:25:27,820
And we've been investing particularly in healthcare real estate for around about 10 years.

330
00:25:27,820 --> 00:25:30,660
So we've got two funds in that space.

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We've got an institutional healthcare fund and that's for a number of super fund clients

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00:25:35,960 --> 00:25:36,960
across Australia.

333
00:25:36,960 --> 00:25:42,360
So Australia has around 1.5 billion invested in healthcare assets across Australia.

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And that's your predominantly larger tertiary or larger secondary style assets.

335
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So think large private hospitals.

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And then we've also got a fund which is more for our high net worth and sophisticated clients,

337
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which is around about 500 million.

338
00:26:00,020 --> 00:26:04,780
And that invests in predominantly GP clinics and allied health clinics and maybe smaller

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00:26:04,780 --> 00:26:06,320
day hospitals, things like that.

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00:26:06,320 --> 00:26:10,880
So we've been investing heavily and directly in property for over a decade and we've got

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00:26:10,880 --> 00:26:13,180
around about 2 billion invested in that space.

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00:26:13,180 --> 00:26:18,180
And with that, we've got probably one of the largest dedicated asset management teams in

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00:26:18,180 --> 00:26:21,660
the country to managing those real estate properties.

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So I mean, that's, you know, everyone kind of, some people think that real estate is

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00:26:24,740 --> 00:26:25,740
a passive game.

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00:26:25,740 --> 00:26:27,940
No, it's very much an active management game.

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00:26:27,940 --> 00:26:33,300
And so from that experience in healthcare, we had a lot of our healthcare providers talking

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to us and saying, hey, you know, we've got a large number of people with disability,

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you know, stuck in our hospitals or some of these healthcare groups would have disability

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00:26:44,740 --> 00:26:45,740
care provider arms.

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00:26:45,740 --> 00:26:51,360
And they'd say, hey, have Barwon heard about this new sector called specialist disability

352
00:26:51,360 --> 00:26:52,360
accommodation?

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Because it actually really needs an institutional grade manager to come to it and actually do

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this properly.

355
00:27:00,020 --> 00:27:05,900
Because, you know, like what you just mentioned, a lot of us were seeing, you know, groups

356
00:27:05,900 --> 00:27:15,060
and Facebook ads and all kinds of things promising, you know, crazy 15 to 17% yields, you know,

357
00:27:15,060 --> 00:27:17,980
with properties kind of in the middle of nowhere.

358
00:27:17,980 --> 00:27:23,740
And people were really concerned that, you know, that wasn't that type of product actually

359
00:27:23,740 --> 00:27:26,780
wasn't going to be the best outcome for participants.

360
00:27:26,780 --> 00:27:32,940
You can most certainly look at the SDA price guide and see how you might quickly want to

361
00:27:32,940 --> 00:27:35,820
derive a 15 to 17% return.

362
00:27:35,820 --> 00:27:40,260
And that's because you can go and buy the land really, really cheap somewhere and build

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00:27:40,260 --> 00:27:41,940
a really, really cheap house.

364
00:27:41,940 --> 00:27:46,620
And, you know, on the back of a spreadsheet, you can create a 17% return.

365
00:27:46,620 --> 00:27:50,020
And a lot of that did happen, you know, like any good government scheme.

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00:27:50,020 --> 00:27:52,980
Unfortunately, there was a lot of people that came out and thought it was a bit of a get

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00:27:52,980 --> 00:27:54,940
rich quick scheme.

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00:27:54,940 --> 00:27:56,620
And they piled into the sector.

369
00:27:56,620 --> 00:27:58,900
So when you think about, you know, what is that?

370
00:27:58,900 --> 00:28:00,260
How's that, you know, impacted?

371
00:28:00,260 --> 00:28:06,500
Well, if you look at Southeast Queensland, there's roughly twice the number of SDA beds

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00:28:06,500 --> 00:28:09,060
built than those with SDA funding, right?

373
00:28:09,060 --> 00:28:12,340
So it's a massive oversupply.

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00:28:12,340 --> 00:28:16,660
And that's predominantly come from that property spruikers, you know, into the self-managed

375
00:28:16,660 --> 00:28:18,780
superfund style of market.

376
00:28:18,780 --> 00:28:23,300
If you double click on Southeast Queensland and you zoom in a little bit more on a micro

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00:28:23,300 --> 00:28:28,260
level, the majority of that supplies are coming in on Caboolture, Ipswich and Logan.

378
00:28:28,260 --> 00:28:31,060
And what's the thing that kind of ties those areas together?

379
00:28:31,060 --> 00:28:35,540
You know, fringe, really cheap land and a lot of people piled in.

380
00:28:35,540 --> 00:28:40,140
So, you know, that was some unfortunate consequences that have come out to it.

381
00:28:40,140 --> 00:28:46,540
You know, we think on a kind of diversified portfolio level, and it very much aligns with

382
00:28:46,540 --> 00:28:49,540
the government calculations on this, which are published for everyone to see.

383
00:28:49,540 --> 00:28:56,540
So the government really designed this scheme to have sensible, normal, kind of relatively

384
00:28:56,540 --> 00:29:01,780
risk adjusted returns like you would see against other asset classes in real estate, you know,

385
00:29:01,780 --> 00:29:07,620
kind of in that 8 to 10% total return with a distribution yield of kind of 5 to 7%.

386
00:29:07,620 --> 00:29:11,980
That's broadly what the government has published of how they think about rent should be set,

387
00:29:11,980 --> 00:29:18,360
not the kind of double digit returns that have been promised by some groups appealing

388
00:29:18,360 --> 00:29:22,640
to that more of that retail type of investor.

389
00:29:22,640 --> 00:29:26,620
And so that's, you know, what we've been building our fund to deliver.

390
00:29:26,620 --> 00:29:34,220
A big focus for us is not trying to drive for yield or yield on cost, but actually solve

391
00:29:34,220 --> 00:29:38,140
for occupancy and minimizing vacancy.

392
00:29:38,140 --> 00:29:42,740
You know, a lot of that stock in Southeast Queensland is just not occupied because it's

393
00:29:42,740 --> 00:29:44,860
just so much saturation.

394
00:29:44,860 --> 00:29:49,860
Whereas fortunately in our portfolio, we've got 100% or near 100% occupation because we

395
00:29:49,860 --> 00:29:55,060
make sure that we buy assets that are really close to amenity, have a good underlying land

396
00:29:55,060 --> 00:30:00,700
value that are in areas deeply serviced by care, that are places they're going to attract

397
00:30:00,700 --> 00:30:03,080
and retain tenants over the long term.

398
00:30:03,080 --> 00:30:09,820
Because if you're solving for a 15 or 17% margin and you're choosing maybe an extra

399
00:30:09,820 --> 00:30:13,100
5 or 6 kilometres out of town, then you probably should be.

400
00:30:13,100 --> 00:30:17,780
Well, someone like ourselves who have a different type of approach that kind of solving for

401
00:30:17,780 --> 00:30:22,900
the long term sustainability of the asset, where we're happy for that 8 to 10% total

402
00:30:22,900 --> 00:30:28,220
return, we'll just go and buy a plot of land and work with the developer to develop an

403
00:30:28,220 --> 00:30:31,300
asset right next to the shopping centre, right in town.

404
00:30:31,300 --> 00:30:37,020
And that's going to be much more attractive to participants over the long term.

405
00:30:37,020 --> 00:30:41,460
On the mechanics of that, you said a number of things, which are very interesting.

406
00:30:41,460 --> 00:30:44,060
Can we just jump into the mechanics?

407
00:30:44,060 --> 00:30:48,780
So you said target 8 to 10%.

408
00:30:48,780 --> 00:30:52,380
What's the average return for the past 12 months?

409
00:30:52,380 --> 00:30:53,860
What are you forecasting?

410
00:30:53,860 --> 00:30:56,660
Yeah, so the fund is two years old.

411
00:30:56,660 --> 00:31:00,860
So happy to talk around total return to date, but let's start on the last 12 months.

412
00:31:00,860 --> 00:31:05,540
So the last 12 months, we had a total return of just over 14%.

413
00:31:05,540 --> 00:31:10,140
And that was driven by around about a 4.8% income distribution yield.

414
00:31:10,140 --> 00:31:19,340
So real cash distribution to our investors and a circa 9.5%, 9.5% capital return.

415
00:31:19,340 --> 00:31:24,540
Now the capital return was greatly supported this year by the SDA price guide review that

416
00:31:24,540 --> 00:31:26,280
we talked about earlier.

417
00:31:26,280 --> 00:31:34,060
So for funding packages in the sector, we had an average of 18.5% rental increase this

418
00:31:34,060 --> 00:31:35,820
year.

419
00:31:35,820 --> 00:31:41,060
That was mostly against the lower funded categories, as I mentioned, so bringing those up towards

420
00:31:41,060 --> 00:31:42,880
the higher funded categories.

421
00:31:42,880 --> 00:31:47,180
So our portfolio benefited from that increase.

422
00:31:47,180 --> 00:31:50,740
And also we bought some assets quite well.

423
00:31:50,740 --> 00:31:56,140
If you look at the return to date, I think we're around about 7.5% total return.

424
00:31:56,140 --> 00:32:01,640
But we've got to remember the first 12 months, we had lots of deposits out the door and things

425
00:32:01,640 --> 00:32:06,700
not earning money, which kind of dragged the returns for the first 12 months.

426
00:32:06,700 --> 00:32:12,100
We'd probably say the last 12 months is fantastic for existing investors, but not a guide going

427
00:32:12,100 --> 00:32:13,100
forward.

428
00:32:13,100 --> 00:32:20,220
We would expect, again, that 8% to 10% return as our outlook, with a 5% to 7% real cash

429
00:32:20,220 --> 00:32:22,320
distribution yield.

430
00:32:22,320 --> 00:32:29,300
So on the cash drag, we chatted about this at lunch the other day, which was very interesting.

431
00:32:29,300 --> 00:32:34,060
How does, say you spot an opportunity, you want to pick up this fund, you want to work

432
00:32:34,060 --> 00:32:36,780
with a developer.

433
00:32:36,780 --> 00:32:42,100
Does the fund, do investors just allocate money to the fund, the cash builds up, then

434
00:32:42,100 --> 00:32:43,540
you go find an asset?

435
00:32:43,540 --> 00:32:47,940
Or do you go find an asset, then you open the fund up to invest?

436
00:32:47,940 --> 00:32:49,740
How does it work?

437
00:32:49,740 --> 00:32:54,420
Yeah, well, when we originally set up the fund, it was a capital call structure.

438
00:32:54,420 --> 00:32:59,180
So investors would pledge a certain amount that they were willing to invest, and we called

439
00:32:59,180 --> 00:33:01,780
that down progressively.

440
00:33:01,780 --> 00:33:08,060
We've now deployed all that capital, and we recently put in a major bank facility, about

441
00:33:08,060 --> 00:33:10,900
$40 million with ANZ.

442
00:33:10,900 --> 00:33:15,020
So we're well supported from a debt perspective by Australian major banks.

443
00:33:15,020 --> 00:33:19,940
We ran a process, and ANZ was the winner of that.

444
00:33:19,940 --> 00:33:25,020
So going forward, a couple of acquisitions we've got in the pipeline at the moment, we're

445
00:33:25,020 --> 00:33:29,300
using that available debt headroom to us, and making sure that all acquisitions are

446
00:33:29,300 --> 00:33:30,940
distribution accretive.

447
00:33:30,940 --> 00:33:35,140
And then for future capital raisings, which we've got a capital raising at the moment,

448
00:33:35,140 --> 00:33:40,980
what we're looking to do is just immediately unitise our investors against acquisitions

449
00:33:40,980 --> 00:33:48,300
coming into the fund, or pay down debt, small amounts of debt, but then use that dead headroom

450
00:33:48,300 --> 00:33:50,900
to immediately then re-roll into new acquisitions.

451
00:33:50,900 --> 00:33:56,060
So in terms of cash drag, there's a big focus on not having any cash drag in the fund.

452
00:33:56,060 --> 00:34:01,780
And so we'll do that by really managing the debt profile, or raising in time and in line

453
00:34:01,780 --> 00:34:04,080
with new acquisitions.

454
00:34:04,080 --> 00:34:08,620
And how long does it take to get money into the fund, and what are the redemptions?

455
00:34:08,620 --> 00:34:12,820
Yeah, so pretty quick to get money into the fund.

456
00:34:12,820 --> 00:34:14,460
So we've got a capital raising at the moment.

457
00:34:14,460 --> 00:34:19,380
We're looking at closing that around 8th of December, because these assets are-

458
00:34:19,380 --> 00:34:21,380
What's she raising?

459
00:34:21,380 --> 00:34:23,260
Looking to raise 10 to 15.

460
00:34:23,260 --> 00:34:25,820
That's the target this time round.

461
00:34:25,820 --> 00:34:31,580
But we imagine that going forward, we'll probably do more frequent but smaller style raises.

462
00:34:31,580 --> 00:34:37,300
So around that 10 to 15 mark, these assets are generally quite small, an average ticket

463
00:34:37,300 --> 00:34:39,840
size of 5 to 10 million.

464
00:34:39,840 --> 00:34:44,380
So we want to be batching a few of those together before we do a raise.

465
00:34:44,380 --> 00:34:49,000
And so we imagine we'll just be doing those in more frequent instalments.

466
00:34:49,000 --> 00:34:51,380
So it's pretty easy to get the money in.

467
00:34:51,380 --> 00:34:55,820
In terms of getting the money out, this is an open-ended fund, but with closed-ended

468
00:34:55,820 --> 00:34:56,980
features.

469
00:34:56,980 --> 00:35:02,160
So the liquidity profile is there's a redemption window every five years from the birth date

470
00:35:02,160 --> 00:35:03,740
of the fund.

471
00:35:03,740 --> 00:35:06,620
The birth date was May 2021.

472
00:35:06,620 --> 00:35:12,000
So the next one will be in May 2026, so about two and a half years away from now, and then

473
00:35:12,000 --> 00:35:14,220
every five years after that.

474
00:35:14,220 --> 00:35:20,060
Of course, we do for really extenuating circumstances, divorce or death.

475
00:35:20,060 --> 00:35:24,980
We'll try and help our investors if they need liquidity, but we can only offer that on really

476
00:35:24,980 --> 00:35:30,300
a best endeavours basis by matching them off against other investors that want to come

477
00:35:30,300 --> 00:35:31,300
in.

478
00:35:31,300 --> 00:35:34,980
We do try and help our investors where we can, but we do offer those redemption windows

479
00:35:34,980 --> 00:35:39,300
as well if they want to redeem larger amounts of their capital.

480
00:35:39,300 --> 00:35:46,660
Okay, so talking about the opportunity of purchasing these assets, how does it work?

481
00:35:46,660 --> 00:35:49,300
Does it like, I'm in Lancôpe.

482
00:35:49,300 --> 00:35:52,660
I think Lancôpe just got voted like one of the most upcoming suburbs, right?

483
00:35:52,660 --> 00:35:56,700
So assuming say you have families or loved ones, someone's got someone disabled, they

484
00:35:56,700 --> 00:35:58,580
want to be close to home.

485
00:35:58,580 --> 00:36:04,180
There's some assets around, but there's no real complete knockdown buildings.

486
00:36:04,180 --> 00:36:09,380
Let's throw up, I don't know, 10 in one particular place.

487
00:36:09,380 --> 00:36:14,900
How would you go about exploring your product for Lancôpe as an example?

488
00:36:14,900 --> 00:36:20,180
Yeah, so I think there is some SDA actually coming up in Lancôpe, not by us, but by others.

489
00:36:20,180 --> 00:36:25,780
I was just out this morning looking at our new project in Macquarie Park actually, and

490
00:36:25,780 --> 00:36:28,620
we've got 20 units coming up there.

491
00:36:28,620 --> 00:36:34,580
Typically, we start off at a very macro level.

492
00:36:34,580 --> 00:36:38,900
The NDIA publishes really good data.

493
00:36:38,900 --> 00:36:44,620
It's not always the most reliable, but we take it as directional, and it's pretty good

494
00:36:44,620 --> 00:36:45,620
from that perspective.

495
00:36:45,620 --> 00:36:50,160
So they actually do post where all the new supply is coming online.

496
00:36:50,160 --> 00:36:57,060
So there's a two-step process in registering an SDA dwelling within the NDIS, and as a

497
00:36:57,060 --> 00:37:01,060
result of that two-step process, they have really good data about what's in the design

498
00:37:01,060 --> 00:37:04,140
phase and what has been completed.

499
00:37:04,140 --> 00:37:08,660
And then secondly, because they've got all the address data of all the SDA participants,

500
00:37:08,660 --> 00:37:12,300
they've got a pretty good idea of generally where they live.

501
00:37:12,300 --> 00:37:17,140
And so you can use that data to kind of at a macro directional level, first start to

502
00:37:17,140 --> 00:37:21,820
identify where are the major pockets of oversupply and where the major pockets of undersupply.

503
00:37:21,820 --> 00:37:28,620
So we would start kind of there, and you'd broadly say the North Shore or Lane Cove area

504
00:37:28,620 --> 00:37:34,260
is probably very undersupplied by virtue of the fact that there's actually not a huge

505
00:37:34,260 --> 00:37:37,520
amount of new stock coming on there generally in the residential market.

506
00:37:37,520 --> 00:37:40,300
And if they do, the land price is very, very expensive.

507
00:37:40,300 --> 00:37:43,560
So probably to date, it's been a bit exclusionary from SDA.

508
00:37:43,560 --> 00:37:49,020
But if we did have a developer there that was looking to do a larger scale development,

509
00:37:49,020 --> 00:37:54,060
say three or 400 units, we would either get in touch with them or they would get in touch

510
00:37:54,060 --> 00:38:00,740
with us or one of our SDA providers or care providers might know that developer or whatnot.

511
00:38:00,740 --> 00:38:07,860
And they might approach us with an opportunity to buy SDA units out of that particular development.

512
00:38:07,860 --> 00:38:14,140
So we would work with that developer to understand what changes would need to be made to their

513
00:38:14,140 --> 00:38:15,140
project.

514
00:38:15,140 --> 00:38:21,140
All projects probably across Australia need to be DDA compliant or in line with the disability

515
00:38:21,140 --> 00:38:24,180
design requirements.

516
00:38:24,180 --> 00:38:27,100
But there's an additional level to get the SDA standard.

517
00:38:27,100 --> 00:38:34,060
So we would work with them to figure out if we can get these SDA units into their building.

518
00:38:34,060 --> 00:38:38,540
We would then work with them on the price point that we could afford to pay, run that

519
00:38:38,540 --> 00:38:40,220
through our models.

520
00:38:40,220 --> 00:38:45,220
And then basically we would contract with that developer or that builder to deliver

521
00:38:45,220 --> 00:38:49,900
us those SDA units when they complete the project.

522
00:38:49,900 --> 00:38:56,540
And so that particular project would first require an SDA design certificate where we

523
00:38:56,540 --> 00:39:04,340
employ a specialist, sector specific SDA assessor or certifier to review the designs and sign

524
00:39:04,340 --> 00:39:05,340
them off.

525
00:39:05,340 --> 00:39:11,500
And then secondly, after a series of inspections through the build, that SDA assessor will

526
00:39:11,500 --> 00:39:16,660
then sign off that has been built to the correct standard and then it's certified.

527
00:39:16,660 --> 00:39:23,020
Once it's certified, that package and that documentation goes off to the NDIA itself

528
00:39:23,020 --> 00:39:28,660
and they have a team in there that reviews the plans, reviews the certification and actually

529
00:39:28,660 --> 00:39:31,820
then issues you a certificate of enrolment.

530
00:39:31,820 --> 00:39:37,860
And once we receive that certificate of enrolment, that's when we acquire or settle on the property

531
00:39:37,860 --> 00:39:41,260
and start to advertise it, to lease it up.

532
00:39:41,260 --> 00:39:45,140
Well, in truth, we're actually advertising kind of six to nine months out, but that's

533
00:39:45,140 --> 00:39:49,860
when we have an opportunity for participants to actually come through the premises.

534
00:39:49,860 --> 00:39:54,620
And for this particular cohort or customer set, it was very similar to what I experienced

535
00:39:54,620 --> 00:39:57,220
in the retirement living sector.

536
00:39:57,220 --> 00:40:05,220
Moving is a really big life event for many of us, but much, even though it's as difficult

537
00:40:05,220 --> 00:40:10,620
as it is being fully ably bodied for those who do have high degree of functional impairment,

538
00:40:10,620 --> 00:40:15,380
who require very much on external service providers on a day to day basis, moving is

539
00:40:15,380 --> 00:40:16,420
a really big deal.

540
00:40:16,420 --> 00:40:22,280
So they want to look, touch and feel the product generally before committing to move in there.

541
00:40:22,280 --> 00:40:28,060
So we'll often, if we can, negotiate a display suite to come forward so we can help those

542
00:40:28,060 --> 00:40:30,380
participants understand what they'll be moving into.

543
00:40:30,380 --> 00:40:34,620
But yeah, once we settle, we then advertise and start providing leases to our tenants.

544
00:40:34,620 --> 00:40:38,740
And hopefully those moving in choose it as their forever home and are going to stay with

545
00:40:38,740 --> 00:40:40,300
us for a very long time.

546
00:40:40,300 --> 00:40:41,300
Hopefully.

547
00:40:41,300 --> 00:40:44,420
So how does the relationship work with the developers?

548
00:40:44,420 --> 00:40:48,620
Do you give them access just to lending or you provide the equity piece?

549
00:40:48,620 --> 00:40:50,380
How does that work?

550
00:40:50,380 --> 00:40:56,100
Yeah, different approaches for different types of developers and different types of products.

551
00:40:56,100 --> 00:41:03,060
So that product I just spoke to where we might be buying 10 units out of a much, much larger

552
00:41:03,060 --> 00:41:08,140
residential development, we'll just enter into a forward purchase agreement, much like

553
00:41:08,140 --> 00:41:14,340
any person buying off the plan would enter into, that when that project is built, certified

554
00:41:14,340 --> 00:41:17,260
and enrolled, we'll then settle on the property.

555
00:41:17,260 --> 00:41:21,060
So whilst we don't give them finance, we do give them a contract, which they can then

556
00:41:21,060 --> 00:41:27,400
take to the bank as part of their pre-sales commitment to go and get financing.

557
00:41:27,400 --> 00:41:30,780
For other projects, we'll buy them as going concerns.

558
00:41:30,780 --> 00:41:35,680
So a developer might have already built it, got it enrolled, and they've actually wanted

559
00:41:35,680 --> 00:41:38,880
to extract as much value as possible from the deal.

560
00:41:38,880 --> 00:41:41,480
So they've actually got it fully leased up.

561
00:41:41,480 --> 00:41:44,400
And then we'll look to just buy that off them.

562
00:41:44,400 --> 00:41:50,580
The third option we offer for our most trusted developers is what we call a fund through

563
00:41:50,580 --> 00:41:51,580
agreement.

564
00:41:51,580 --> 00:41:54,740
And effectively, that's a finance to own structure.

565
00:41:54,740 --> 00:41:59,100
So a developer might have a project that we really, really like.

566
00:41:59,100 --> 00:42:02,880
For some reason or another, they don't want to go with a third party bank.

567
00:42:02,880 --> 00:42:06,320
They would prefer us to finance the entire development.

568
00:42:06,320 --> 00:42:12,020
Maybe they don't have the 50% equity that would be required to do the development themselves,

569
00:42:12,020 --> 00:42:13,460
but they've got a really good project.

570
00:42:13,460 --> 00:42:15,180
They've got a good team around them.

571
00:42:15,180 --> 00:42:17,240
They've got a good builder in place.

572
00:42:17,240 --> 00:42:19,080
And we can go and review all this.

573
00:42:19,080 --> 00:42:25,340
Well actually, when they achieve a certain milestone, which is usually linked to getting

574
00:42:25,340 --> 00:42:30,680
the appropriate planning approvals in place, getting the as-built certificate, and getting

575
00:42:30,680 --> 00:42:36,880
a building contract, lump sum building contract in place, so we have clarity on the feasibility

576
00:42:36,880 --> 00:42:37,880
of that asset.

577
00:42:37,880 --> 00:42:42,940
We'll actually then buy the land at that point and then finance through the rest of the

578
00:42:42,940 --> 00:42:44,340
construction.

579
00:42:44,340 --> 00:42:51,140
And so in that way, when they achieve enrollment and certification and leasing up of the property,

580
00:42:51,140 --> 00:42:52,240
that's at the end of the project.

581
00:42:52,240 --> 00:42:58,600
We actually pay them out a development profit, but we also get to charge a coupon on all

582
00:42:58,600 --> 00:43:03,640
that money that we've provided for that project up until completion.

583
00:43:03,640 --> 00:43:08,440
And so in that way, we're able to pass all the development risk and the leasing risk

584
00:43:08,440 --> 00:43:15,520
to our counterparties, and we just get a smooth return for our investors.

585
00:43:15,520 --> 00:43:21,040
Considering the rates currently, what would you charge on that money?

586
00:43:21,040 --> 00:43:22,040
Yeah.

587
00:43:22,040 --> 00:43:28,960
When you think about, we basically apply a similar way that you would look at the overall

588
00:43:28,960 --> 00:43:30,740
debt and equity for a project.

589
00:43:30,740 --> 00:43:34,840
So let's just make it for easy maths here, 50-50.

590
00:43:34,840 --> 00:43:39,720
So we would say 50% would need to be equity.

591
00:43:39,720 --> 00:43:44,560
Development equity at the moment can range anywhere from 15% to 20%, depending on who

592
00:43:44,560 --> 00:43:47,240
you are or the type of project.

593
00:43:47,240 --> 00:43:52,080
If it's a simpler single-story project with a guaranteed takeout, maybe equity is a bit

594
00:43:52,080 --> 00:43:53,080
cheaper.

595
00:43:53,080 --> 00:44:01,280
And then if you're going to get debt, you might have 50% at anywhere between 7% and

596
00:44:01,280 --> 00:44:05,360
10%, depending whether you can get a major bank to sponsor you or whether you need to

597
00:44:05,360 --> 00:44:06,840
go to a private lender.

598
00:44:06,840 --> 00:44:12,960
And so you multiply those two together and you look at an all-in cost of capital, maybe

599
00:44:12,960 --> 00:44:20,120
circa 10% to 13%, somewhere in that range.

600
00:44:20,120 --> 00:44:27,640
Cost of capital is 10% to 13%, and then you take ownership of the asset and then lease

601
00:44:27,640 --> 00:44:33,680
that asset out to the users within the SDA scheme.

602
00:44:33,680 --> 00:44:34,680
Yeah.

603
00:44:34,680 --> 00:44:38,280
So we'll charge a coupon somewhere in that 10% to 13% range for finance.

604
00:44:38,280 --> 00:44:42,120
So all of the capital remembering in that fund through structure, the developer at that

605
00:44:42,120 --> 00:44:45,720
point has been paid back for the land.

606
00:44:45,720 --> 00:44:48,760
So they've got all their money back out of the project.

607
00:44:48,760 --> 00:44:51,120
So it's all their now money going into the project.

608
00:44:51,120 --> 00:44:59,040
Now we do have obviously overview and oversight and audit requirements on how that development's

609
00:44:59,040 --> 00:45:05,240
going, but the developer then takes all those construction time leasing risks and we charge

610
00:45:05,240 --> 00:45:07,280
our coupon in the background.

611
00:45:07,280 --> 00:45:11,320
And then at the end, when it's fully complete, we pay out the remaining development profit.

612
00:45:11,320 --> 00:45:15,440
And then we've got a leased asset, which is going concerned by that point.

613
00:45:15,440 --> 00:45:20,940
And so we're just getting then the return that we've paid for the asset.

614
00:45:20,940 --> 00:45:25,480
So once you have the asset and then you're managing the portfolio of these assets, what's

615
00:45:25,480 --> 00:45:29,160
the hidden, the ongoing costs?

616
00:45:29,160 --> 00:45:31,200
The number of these are strata buildings, right?

617
00:45:31,200 --> 00:45:37,560
I think we had a conversation about a friend of ours who essentially got hit with a very

618
00:45:37,560 --> 00:45:44,360
large bill because the balcony railings were what, 0.8 of a centimeter below what they

619
00:45:44,360 --> 00:45:45,360
should have been.

620
00:45:45,360 --> 00:45:48,400
So now everyone's up for a very, very large bill.

621
00:45:48,400 --> 00:45:51,440
So who copps that cost?

622
00:45:51,440 --> 00:45:55,840
Is it yourself or is it the tenant?

623
00:45:55,840 --> 00:45:57,320
Well it depends.

624
00:45:57,320 --> 00:46:01,840
So we've got different leasing structures in this sector.

625
00:46:01,840 --> 00:46:06,320
So we would have what lots of real estate investors might be familiar with, which is

626
00:46:06,320 --> 00:46:10,160
a triple net commercial lease style structure.

627
00:46:10,160 --> 00:46:15,840
Under that structure, there may be provisions or carve outs that any capex is actually the

628
00:46:15,840 --> 00:46:22,120
responsibility of the tenant, so not the responsibility of the fund or to our investors.

629
00:46:22,120 --> 00:46:26,280
And then we do have other types of agreements which are called pass through agreements or

630
00:46:26,280 --> 00:46:27,900
pass through leases.

631
00:46:27,900 --> 00:46:32,600
They're effectively management agreements registered on title, which mean it's actually

632
00:46:32,600 --> 00:46:37,560
the fund's responsibility if there was any capex or if there's any vacancy that we take

633
00:46:37,560 --> 00:46:39,220
that responsibility.

634
00:46:39,220 --> 00:46:44,680
If you look at kind of just an OPEX or ongoing operational kind of costs of particularly

635
00:46:44,680 --> 00:46:51,920
the pass throughs, you might expect somewhere in the kind of sense of 20% of the income

636
00:46:51,920 --> 00:46:53,680
does go to property outgoing.

637
00:46:53,680 --> 00:47:00,320
So that's both the property and the SDA managers who charge anywhere from 5% to 15%, depending

638
00:47:00,320 --> 00:47:03,040
on which group you're talking to.

639
00:47:03,040 --> 00:47:07,480
And then the capex, we make allowances below the line for capex.

640
00:47:07,480 --> 00:47:11,280
Of course, the majority of the assets that we're buying at the moment, the sector's only

641
00:47:11,280 --> 00:47:14,920
five years old, particularly it started ramping up.

642
00:47:14,920 --> 00:47:19,880
So you'd say the average age of an SDA is probably in the two to three year old kind

643
00:47:19,880 --> 00:47:20,880
of bracket.

644
00:47:20,880 --> 00:47:22,820
So these are all very new properties.

645
00:47:22,820 --> 00:47:29,640
So investors in the early stages of this sector do actually benefit from depreciation and

646
00:47:29,640 --> 00:47:31,560
tax deferred nature of the rents.

647
00:47:31,560 --> 00:47:37,640
I think in our last quarter, 84 cents of every dollar returned was tax deferred status.

648
00:47:37,640 --> 00:47:39,880
So you do have the depreciation benefits.

649
00:47:39,880 --> 00:47:45,320
But yeah, going forward, there will be capex like for any kind of asset class or real estate

650
00:47:45,320 --> 00:47:46,320
asset class.

651
00:47:46,320 --> 00:47:48,400
And in some instances, that is for the fund.

652
00:47:48,400 --> 00:47:50,620
And some instances, it's actually for our tenants.

653
00:47:50,620 --> 00:47:56,720
But in all instances, we do actually model that all in and make sure we're still getting

654
00:47:56,720 --> 00:48:01,920
our target return after consideration for capex.

655
00:48:01,920 --> 00:48:06,920
So it sounds like you're running things quite well, but even for yourselves, there's always

656
00:48:06,920 --> 00:48:08,960
risks even if you're doing the conservative side.

657
00:48:08,960 --> 00:48:13,960
So where do you think the risks are for buy one strategy?

658
00:48:13,960 --> 00:48:19,080
The biggest and most obvious risk, which we get feedback from our investors on is just

659
00:48:19,080 --> 00:48:23,480
the government regulation risk around SDA and the NDIS.

660
00:48:23,480 --> 00:48:32,280
As we talked about at the beginning of the call or podcast that the SDA component, we

661
00:48:32,280 --> 00:48:38,440
feel comforted by the fact that SDA is such a small amount of the NDIS budget and SDA

662
00:48:38,440 --> 00:48:46,080
caters towards the most people who need the NDIS, that from an overall regulatory perspective,

663
00:48:46,080 --> 00:48:48,280
that SDA is protected.

664
00:48:48,280 --> 00:48:52,360
But of course, we can't give absolute guarantees around that.

665
00:48:52,360 --> 00:48:56,920
However, it's very much written into all of the information that's published about SDA

666
00:48:56,920 --> 00:48:58,880
that it is here to stay.

667
00:48:58,880 --> 00:49:04,880
And it has kind of at least a 20 year life on it, which is how we model our assets.

668
00:49:04,880 --> 00:49:08,920
So they've kind of got a 20 year life and then they revert back to existing stock.

669
00:49:08,920 --> 00:49:12,160
So that's probably the biggest and most obvious risk.

670
00:49:12,160 --> 00:49:22,740
The next one is, which concerns me more broadly for the sector, is what I call product obsolescence.

671
00:49:22,740 --> 00:49:28,720
So when you think about the iPhone, when you go to get a new iPhone, you're never going

672
00:49:28,720 --> 00:49:30,160
back to the iPhone one.

673
00:49:30,160 --> 00:49:34,000
You're always going to what's the latest, what's the last couple of generations I can

674
00:49:34,000 --> 00:49:37,760
afford, or if you can't afford it and the budget, you know, in your personal budget

675
00:49:37,760 --> 00:49:41,120
is unconstrained, then you go for the latest iPhone.

676
00:49:41,120 --> 00:49:45,480
So there will be more supply that comes into this sector over time.

677
00:49:45,480 --> 00:49:49,400
And so you want to make sure that the stock that you're buying and owning is going to

678
00:49:49,400 --> 00:49:51,000
last the test of time.

679
00:49:51,000 --> 00:49:55,760
So it's going to be attractive to participants now, and it's going to remain attractive over

680
00:49:55,760 --> 00:49:56,760
the long term.

681
00:49:56,760 --> 00:50:02,240
So it can't easily be usurped by someone building an asset closer to the shopping center, closer

682
00:50:02,240 --> 00:50:05,520
to employment or education opportunities.

683
00:50:05,520 --> 00:50:11,200
You want to make sure that your portfolios is safeguarded for that increased supply that

684
00:50:11,200 --> 00:50:15,600
will inevitably come in over time.

685
00:50:15,600 --> 00:50:20,520
Now the last one, which I was more concerned with, you know, prior to the price guard review

686
00:50:20,520 --> 00:50:22,580
than I am today was the income reversion.

687
00:50:22,580 --> 00:50:27,680
So what happens if you do have assets that are full of higher funded participants and

688
00:50:27,680 --> 00:50:32,800
slowly over time, they unfortunately need to move on or move out and they're replaced

689
00:50:32,800 --> 00:50:35,120
with lower funded participants.

690
00:50:35,120 --> 00:50:40,080
Whilst we did factor into our modeling income reversion occurring over the first five or

691
00:50:40,080 --> 00:50:44,520
six years of an asset to what we deemed a more sustainable tenant mix, much of that

692
00:50:44,520 --> 00:50:46,720
has been offset by this SDA price guard review.

693
00:50:46,720 --> 00:50:49,320
So that doesn't worry me as much anymore.

694
00:50:49,320 --> 00:50:53,000
So those would probably, what we hear from investors is, you know, the regulatory risk,

695
00:50:53,000 --> 00:50:57,320
which, you know, is there, but we don't think it's so present for SDA, but also the making

696
00:50:57,320 --> 00:51:00,520
sure that we've got the right assets that stand for the test of time.

697
00:51:00,520 --> 00:51:02,840
That's probably the biggest thing that we're focused on.

698
00:51:02,840 --> 00:51:06,720
Well, unfortunately, no one's been able to recreate Roman concrete.

699
00:51:06,720 --> 00:51:13,620
So you know, things like concrete cancer and you know, the age of a building and the maintenance

700
00:51:13,620 --> 00:51:17,560
of that building, what happens, you know, as this is building built for 20 years, these

701
00:51:17,560 --> 00:51:19,440
are all new dwellings being purchased, right?

702
00:51:19,440 --> 00:51:23,280
But you know, you just look at any, every single suburb, you know, beautiful houses

703
00:51:23,280 --> 00:51:26,880
30 years ago, they get old, you know, tired.

704
00:51:26,880 --> 00:51:29,160
Does that keep you up at night?

705
00:51:29,160 --> 00:51:33,720
You know, considering, yes, there's changes to the regulatory scheme, but you know, the

706
00:51:33,720 --> 00:51:38,480
dwellings will need in your portfolio, rejuvenation in time.

707
00:51:38,480 --> 00:51:40,160
Like, how does that get factored in?

708
00:51:40,160 --> 00:51:45,840
Yeah, I mean, this is the very reason why we have, you know, the house view that that

709
00:51:45,840 --> 00:51:51,080
real estate is not a passive asset and why we have built in Barwon a significant asset

710
00:51:51,080 --> 00:51:56,920
management team to help maintain and improve our assets across all our funds.

711
00:51:56,920 --> 00:51:59,280
So across the healthcare funds, it's very much the same thing.

712
00:51:59,280 --> 00:52:05,520
So how do you make sure your assets remain attractive to the existing operators or, you

713
00:52:05,520 --> 00:52:09,240
know, GPs who are there at the moment?

714
00:52:09,240 --> 00:52:13,840
And how do we make sure that, you know, those existing, those operators expand with us over

715
00:52:13,840 --> 00:52:16,040
time instead of moving into bigger premises?

716
00:52:16,040 --> 00:52:21,640
How can we increase their footprint on the same piece of land?

717
00:52:21,640 --> 00:52:26,240
Is a very similar mentality to how do we maintain our assets so that they're attractive to our

718
00:52:26,240 --> 00:52:29,880
NDIS participant clients over the long term.

719
00:52:29,880 --> 00:52:34,840
So of course, they're going to need, you know, upgrade and rejuvenation, but we factor that

720
00:52:34,840 --> 00:52:35,840
in.

721
00:52:35,840 --> 00:52:40,480
Each asset, you know, how it works in SDA is they actually enrolled for what's called

722
00:52:40,480 --> 00:52:47,560
the new build funding for 20 years and then they revert to existing stock funding.

723
00:52:47,560 --> 00:52:52,360
And so, you know, when we think about that, we look at a few different scenarios.

724
00:52:52,360 --> 00:52:58,400
One is that they do return to existing stock funding and that rent drops by about 70%.

725
00:52:58,400 --> 00:53:05,000
Two, we look at, you know, maybe that asset is tied by that point and it would be better

726
00:53:05,000 --> 00:53:06,000
for residents.

727
00:53:06,000 --> 00:53:09,680
There may be new product that sprung up locally and they might want to move across to that

728
00:53:09,680 --> 00:53:10,680
new product.

729
00:53:10,680 --> 00:53:15,840
So then we have a certain amount of refurbishment to take it back to residential and then sell

730
00:53:15,840 --> 00:53:17,120
it on the market.

731
00:53:17,120 --> 00:53:22,620
And then the last option, which we include in our analysis, but we don't rely on in terms

732
00:53:22,620 --> 00:53:27,640
of our performance or underwriting of the assets ahead of acquiring them is actually

733
00:53:27,640 --> 00:53:31,040
refurbing them and then getting another 20 year life out of them.

734
00:53:31,040 --> 00:53:38,240
So as at today, there's no mechanism in place to basically recertify a new build dwelling

735
00:53:38,240 --> 00:53:39,240
and get another 20 years.

736
00:53:39,240 --> 00:53:41,440
It can only revert to existing stock.

737
00:53:41,440 --> 00:53:45,680
My sense is that that will probably change over time.

738
00:53:45,680 --> 00:53:50,080
The government, you know, in 10 years time may say, hey, we're facing a bit of a cliff

739
00:53:50,080 --> 00:53:54,840
here where, you know, five to 10,000 residents are going to have to move out of their homes

740
00:53:54,840 --> 00:53:58,840
potentially over the next 10 or so years.

741
00:53:58,840 --> 00:54:02,840
Do we really want to rebuild a whole asset class again from scratch?

742
00:54:02,840 --> 00:54:07,800
And then maybe a scenario where you actually do a larger style refurbishment and then release

743
00:54:07,800 --> 00:54:11,640
it out again for another 20 years as new build stock.

744
00:54:11,640 --> 00:54:15,440
So yeah, you know, like any other real estate asset class, it's not immune from having to

745
00:54:15,440 --> 00:54:20,560
do upgrade works, but it's fairly low touch, you know, kind of in keeping with what you

746
00:54:20,560 --> 00:54:24,840
would see in other residential properties.

747
00:54:24,840 --> 00:54:32,760
So with the coming year and the coming years, as you said, you look at macro as in where

748
00:54:32,760 --> 00:54:36,600
you're going first, you've got to raise on as well with those assets you're looking to

749
00:54:36,600 --> 00:54:37,600
pick up.

750
00:54:37,600 --> 00:54:39,560
How do you see the opportunity currently in the market?

751
00:54:39,560 --> 00:54:45,440
Yeah, I mean, there's a little bit of the magic that we don't give too much away and

752
00:54:45,440 --> 00:54:50,520
tell everyone all of our ideas, but there's definitely places we want to be very careful

753
00:54:50,520 --> 00:54:54,920
on and then very other places that we're very bullish on.

754
00:54:54,920 --> 00:55:00,920
You know, broadly, there seems to be a real push if you talk to the underlying customers

755
00:55:00,920 --> 00:55:07,000
that they want to have, you know, where possible sole occupancy as opposed to shared.

756
00:55:07,000 --> 00:55:13,640
So they would prefer to live in a one bed villa or apartment than necessarily have to

757
00:55:13,640 --> 00:55:15,800
share with other people.

758
00:55:15,800 --> 00:55:22,720
Now the tension there is that the NDIA, because it's more cost effective to do so, would prefer

759
00:55:22,720 --> 00:55:26,160
to provide shared accommodation funding.

760
00:55:26,160 --> 00:55:29,960
So that's kind of the kind of one balance that we think about.

761
00:55:29,960 --> 00:55:32,280
The next is that supply demand dynamic.

762
00:55:32,280 --> 00:55:37,120
So, you know, northern parts of Adelaide, southern parts of Adelaide, you know, lots

763
00:55:37,120 --> 00:55:44,560
of parts of WA, stretches of Victoria we really like, whereas also all across New South Wales,

764
00:55:44,560 --> 00:55:47,800
anywhere that's kind of really structurally undersupplied.

765
00:55:47,800 --> 00:55:50,280
And then there's these pockets of extreme oversupplied.

766
00:55:50,280 --> 00:55:56,600
So northwestern suburbs of Melbourne has a significant amount of SDA units.

767
00:55:56,600 --> 00:56:00,720
That's somewhere where, you know, we have the amber or orange light on.

768
00:56:00,720 --> 00:56:04,240
And also, you know, that South East Queensland example that I spoke to earlier, not that

769
00:56:04,240 --> 00:56:09,360
we wouldn't go anywhere in South East Queensland, but particularly places in like Caboolture,

770
00:56:09,360 --> 00:56:11,160
Logan and Ipswich.

771
00:56:11,160 --> 00:56:17,480
You know, we still remain very cautious in areas like that.

772
00:56:17,480 --> 00:56:21,960
So Joss, with all that being said, what keeps you up at night and what gets you out of the

773
00:56:21,960 --> 00:56:23,920
bed in the morning?

774
00:56:23,920 --> 00:56:25,520
Great question.

775
00:56:25,520 --> 00:56:26,840
What keeps me up at night?

776
00:56:26,840 --> 00:56:29,040
Not too much at the moment.

777
00:56:29,040 --> 00:56:37,000
I mean, to date, the sector's been fairly well buffeted from interest rate rises, you

778
00:56:37,000 --> 00:56:43,600
know, against say other core asset classes that, you know, 12, 18, 24 months ago, you

779
00:56:43,600 --> 00:56:48,600
were seeing really core Australian real estate trade in the kind of four and a half to five

780
00:56:48,600 --> 00:56:49,600
and a half range.

781
00:56:49,600 --> 00:56:56,240
You know, we were buying assets in this sector at a substantial spread to those core asset

782
00:56:56,240 --> 00:57:02,640
classes, so anywhere from six and three quarters seven up to seven and a half to eight percent.

783
00:57:02,640 --> 00:57:08,520
So, you know, with our cap rates substantially above the risk free rate, we've been a bit

784
00:57:08,520 --> 00:57:15,480
protected from that, you know, that support of cap rate expansion that we've seen in other

785
00:57:15,480 --> 00:57:18,120
sectors, which has been good for SDA.

786
00:57:18,120 --> 00:57:24,680
However, you know, if central banks continue to have to fight the inflation fight and keep,

787
00:57:24,680 --> 00:57:28,560
you know, ratcheting up further, you know, there will be at some level or at some point

788
00:57:28,560 --> 00:57:30,280
that will start affecting SDA.

789
00:57:30,280 --> 00:57:35,960
Today, we've been buffeted, but you never know what might come down the line.

790
00:57:35,960 --> 00:57:40,960
The second is making sure, which is probably is the answer to both questions, is making

791
00:57:40,960 --> 00:57:45,940
sure that we've got the right property that's going to keep our tenants happy.

792
00:57:45,940 --> 00:57:52,760
And we've got the right care provider partners and the right SDA or property manager partners

793
00:57:52,760 --> 00:57:55,840
to keep make sure that our tenants are happy and want to stay with us.

794
00:57:55,840 --> 00:57:58,240
And so that's both what keeps me up at night.

795
00:57:58,240 --> 00:58:02,640
You know, we are dealing with a really vulnerable part of our society.

796
00:58:02,640 --> 00:58:08,860
We want to make sure that we're setting up real estate and agreements and systems and

797
00:58:08,860 --> 00:58:12,960
processes that those people are being taken care of.

798
00:58:12,960 --> 00:58:17,320
But also that's what gets me up in the day because it's really nice to be able to go

799
00:58:17,320 --> 00:58:18,320
to work.

800
00:58:18,320 --> 00:58:22,440
And, you know, whilst we work in this fairly esoteric world of finance, sometime at the

801
00:58:22,440 --> 00:58:26,600
end of the day, the product that is actually being delivered on the ground is making a

802
00:58:26,600 --> 00:58:32,000
pretty substantial difference to not only that resident or that participant's life,

803
00:58:32,000 --> 00:58:33,620
but also to their family.

804
00:58:33,620 --> 00:58:39,960
You know, we went to an opening of our High Wycombe asset, which is in Perth earlier this

805
00:58:39,960 --> 00:58:40,960
year.

806
00:58:40,960 --> 00:58:44,800
And it was just fantastic to meet with the residents that were coming into that property,

807
00:58:44,800 --> 00:58:45,800
meet with the families.

808
00:58:45,800 --> 00:58:50,760
You know, you've got to remind yourself that many people with disability are kind of in

809
00:58:50,760 --> 00:58:57,000
that 40 or 50, maybe late 30s to 50 kind of age bracket, meaning their parents are in

810
00:58:57,000 --> 00:59:05,240
their kind of their 80s and very much are concerned about when they're not around, how

811
00:59:05,240 --> 00:59:08,320
their children are going to live and where they're going to live.

812
00:59:08,320 --> 00:59:13,480
And so it was really lovely to hear some of the relief in the voices and the commentary

813
00:59:13,480 --> 00:59:17,400
around some of these parents that their child is actually going to live in a really nice

814
00:59:17,400 --> 00:59:20,840
brand new property that they can be proud that their child is living in.

815
00:59:20,840 --> 00:59:25,640
So, you know, a big focus on making sure that we've got happy participants is both what

816
00:59:25,640 --> 00:59:28,640
keeps me up at night, but also gets me up in the morning.

817
00:59:28,640 --> 00:59:29,640
You just jogged my memory.

818
00:59:29,640 --> 00:59:33,560
One of the questions we discussed at lunch was I found quite interesting.

819
00:59:33,560 --> 00:59:43,160
Is it correct that there is no financial limitations on what someone can access as a property?

820
00:59:43,160 --> 00:59:47,880
You don't require a minimum income or your family doesn't need to be incredibly wealthy

821
00:59:47,880 --> 00:59:51,000
to be able to apply for one of these dwellings?

822
00:59:51,000 --> 00:59:52,000
Yeah, correct.

823
00:59:52,000 --> 00:59:55,000
There's no means testing.

824
00:59:55,000 --> 00:59:56,960
Yeah, no means testing.

825
00:59:56,960 --> 01:00:03,760
It's very much a system set up around your level of disability or level of impairment

826
01:00:03,760 --> 01:00:06,880
rather than your economic means or that of your family.

827
01:00:06,880 --> 01:00:17,880
I mean, the majority of people who have a family member with a disability, you know,

828
01:00:17,880 --> 01:00:21,280
it's quite, it used to be quite a large financial impact.

829
01:00:21,280 --> 01:00:25,240
Today it's been much, much, it made much, much easier by the NDIS and financial impact

830
01:00:25,240 --> 01:00:31,160
not only for maybe the specialist equipment they needed, but the time of work that was,

831
01:00:31,160 --> 01:00:36,320
well, time out of work that was required to be able to care for that loved one has a quite

832
01:00:36,320 --> 01:00:37,840
a large impact on the family.

833
01:00:37,840 --> 01:00:44,960
So it's great to see that the NDIS can actually help support those families as best as possible

834
01:00:44,960 --> 01:00:47,360
and reduce that economic burden.

835
01:00:47,360 --> 01:00:49,200
But no, it's not means tested.

836
01:00:49,200 --> 01:00:53,160
Yeah, look, it's been great having you on and listening to your thoughts because, you

837
01:00:53,160 --> 01:00:56,960
know, as we discussed earlier, this has been running for a while and this, you know, obviously

838
01:00:56,960 --> 01:01:00,640
with any scheme, there's a whole lot of people that want to come in and, excuse my French,

839
01:01:00,640 --> 01:01:05,400
take the piss, but it's good to see that good operators like yourself are literally giving,

840
01:01:05,400 --> 01:01:10,120
you know, hope and comfort to families, you know, where essentially they can live close

841
01:01:10,120 --> 01:01:12,960
to loved ones, right?

842
01:01:12,960 --> 01:01:16,200
It's a very good scheme, which is what's occurring.

843
01:01:16,200 --> 01:01:20,600
If anyone was to learn more about Barwon or, you know, the opportunity you currently have

844
01:01:20,600 --> 01:01:26,520
right now to access the investments you're looking to pick up, how are they best to find

845
01:01:26,520 --> 01:01:28,560
you and learn more about what's happening?

846
01:01:28,560 --> 01:01:30,800
Yeah, look, I mean, there's a few different ways.

847
01:01:30,800 --> 01:01:39,400
The most obvious one is our website, which is www.barwon.net.au, a simple Google searches

848
01:01:39,400 --> 01:01:45,280
of Barwon Investment Partners or, you know, Barwon Disability Accommodation Fund.

849
01:01:45,280 --> 01:01:50,360
We also have some videos on YouTube, you know, detailing our quarterly updates as well as

850
01:01:50,360 --> 01:02:00,640
some tours of some of our assets and even some industry style podcasts and kind of webinars

851
01:02:00,640 --> 01:02:05,720
that we've hosted as well, where people can do a little bit of self-learning before getting

852
01:02:05,720 --> 01:02:07,840
in touch with one of our business development teams.

853
01:02:07,840 --> 01:02:14,120
So either Kate Haywood or Brett Scallon, there'll be an opportunity to either get in touch throughout

854
01:02:14,120 --> 01:02:20,240
our phone line, which is on the website or on Google, or there'll be an inquiry form

855
01:02:20,240 --> 01:02:21,240
there as well.

856
01:02:21,240 --> 01:02:24,680
And one of our business development representatives will be able to get in touch with them.

857
01:02:24,680 --> 01:02:27,120
Well, Joss, it's been really good having you on.

858
01:02:27,120 --> 01:02:28,960
I've really enjoyed this conversation.

859
01:02:28,960 --> 01:02:32,120
I really appreciate it and I hope you have a great day.

860
01:02:32,120 --> 01:02:33,120
Thank you very much Murdoch.

861
01:02:33,120 --> 01:02:37,360
It's great to connect and chat here and thanks very much for having me and all the best with

862
01:02:37,360 --> 01:02:40,080
this great podcast of yours.

863
01:02:40,080 --> 01:02:41,080
Thanks Joss.

864
01:02:41,080 --> 01:02:42,080
Have a great one.

865
01:02:42,080 --> 01:02:43,080
Bye.

866
01:02:43,080 --> 01:02:54,800
Thank you.

867
01:02:54,800 --> 01:02:58,760
Any views expressed in this recording do not represent the view of any other third party

868
01:02:58,760 --> 01:03:01,440
and other sole personal opinions of the speaker.

869
01:03:01,440 --> 01:03:05,440
Any reference to financial product does not constitute advice or recommendation and before

870
01:03:05,440 --> 01:03:09,400
any action you should seek proper advice from your financial professional.

871
01:03:09,400 --> 01:03:16,240
Australian listeners should head to www.moneysmart.gov.au to find more information on obtaining financial

872
01:03:16,240 --> 01:03:17,240
advice.

873
01:03:17,240 --> 01:03:28,880
To get in touch with York head to our website www.yorkwealth.com.au.