JACK MAGANN | Oracle Investment Management

Many Australians find themselves priced out of the real estate market. However, there is an alternative path that is gaining traction—Real Estate Investment Trusts (REITs) on the Australian Securities Exchange (ASX). In this episode I sit down with Jack Magann, a portfolio manager at Oracle Investment Management, to delve into the world of REITs and their potential as a viable investment option in 2025.

Jack pivoted from a career as a registered nurse to finance. He shares his journey and insights into the property investment sector. REITs offer an opportunity for investors to gain exposure to commercial properties such as shopping centers, industrial properties, and data centres, without the hefty costs associated with direct property ownership. With REITs, investors can enjoy dividends and property appreciation while avoiding maintenance and interest rate burdens.

The discussion highlights the performance of REITs compared to the broader ASX, noting that while the sector has been volatile due to factors like COVID-19 and rising interest rates, it has outperformed the ASX 200 in recent years. Jack explains how REITs are often seen as a proxy to bonds, providing a stable income stream and acting as a hedge against inflation.

We also siscuss the concept of "sum of the parts" investing (SOTP), using News Corp (ASX:NWS) as a case study. Jack explains how this valuation method can uncover hidden value within conglomerates by assessing each business division separately. This approach can reveal opportunities for investors, especially when companies like News Corp look to unlock shareholder value through strategic sales and buybacks.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Chloe: Shares for Beginners. Phil Musatello and FinPods are authorised reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Jack: I think even if they stay where they are at the moment, reach should perform well as valuations stabilise. We've seen some sectors start to rise in valuations again, like child care centres, and then we've seen earnings start to stabilise as well. And if you get any sort of rate cut there, you should see burnings rise again. So I think it's set up for a strong year in 2025.

Phil: G'day, and welcome back to Shares for Beginners. I'm, um, Phil Muscatello. Uh, with property prices soaring, how can the ASX offer an alternative path to real estate investment? What does this mean for those struggling to get a foothold in the sector? Joining me today is Jack Magann. Reveal everything about property on the ASX. G'day, Jack.

Jack: Hi, Phil, thanks for having me.

Phil: Thanks for coming on and Happy New Year and our first interview of 2025.

Jack: Yeah, happy new Year to you as well. Good to be first off the rank.

Phil: Always good. Jack Magann is a portfolio manager at Oracle Investment Management, where he runs the Emerging Companies and property securities portfolio. So tell us about your path into finance, because you've only been in the finance industry for a short period of time and your previous career wasn't in finance, what happened?

Jack: Yeah, so it's probably quite an unusual one feel. I was working as a registered nurse previously and have been at Oracle now for almost four years. Yeah, and I was working at a registered nurse in hospitals, looking to move into management. And then I started to study a Masters of Commerce to help my transition there. But I realized I had a real passion for investing in the stock market. So, yeah, I did a lot of work myself around investing, doing my own personal investing, first working on my valuations and then the job at Oracle popped up, so I jumped on the chance to switch careers. But, yeah, it has been a big change from working as a registered nurse in an emergency department to working in front of a computer all day on an Excel spreadsheet. It's been a huge change.

Phil: It's, uh, lucky you're passionate about the markets. So I know there's a few listeners that do sometimes want to talk about the path to, uh, changing a career into finance. Was it difficult? I mean, if you're working full time in a very stressful job with a lot of shift work, I'd Assume was it difficult to do the study to move into finance as well?

Jack: Yeah, it was actually quite difficult. I was working full time at the time, obviously doing night shifts in the hospital as well, which didn't help, but I didn't have any kids at the time, so that also helped. But yeah, I was just trying to find the time to study. Also do the extra readings on the asx, like reading announcements, trying to understand allough, working on your valuation. So I did work quite hard to get to where I am today and it was a busy, busy time for me. But I'm glad I did it now because I'm quite happy where I am at the moment.

Phil: So when you first approach me about coming onto the podcast, you mentioned that the issues that many Australians are having in trying to get a foothold in the property market, but the ASX does provide this kind of opportunity. What kind of property can investors buy on the asx?

Jack: Yeah, so it's obviously a very hot topic at the moment, Phil, with young people being priced out of the property market, the residential property market. So, uh, there is alternatives on the ASX. There's investment vehicles called Real Estate Investment Trusts or REITs for short. And a REIT will usually own a specific type of commercial property, like shopping centreers, for example, industrial properties officers, childare centreers, pubs, even data centreers as well. We just had a new IPO for a data center through homecode which the market was excited about, although it hasn't done too well since listing. And yeah, there's also diversify rateits which own, um, properties across different sectors. And the main example there that your viewers might know, uh, would be Charter Hall Group.

Phil: They're the bigger gorilla in the room, aren't they?

Jack: Yeah, that's right, that's right. Yeah, They're a huge, huge route, huge entity. Yeah. And investors, you can buy and sell these units in these trusts the same way you do buy and sell shares on the asx, uh, directly through the broker that you use.

Phil: Do you think there needs to be a bit of a change in the way that investors are thinking about property in that when it gets too difficult to buy property directly, that this is a kind of alternative that can get you on the path?

Jack: Yeah, I think so. Obviously it's Australia, so we all love our property and we go to a barbecue and that's the main topic of conversation. A lot of the time the conversation can be sen around the costs of buying property, costs of maintenance and

00:05:00

Jack: interest rates as well. So, uh, when you are buying a reit, you are avoiding all of those costs directly. So basically you're only paying the broker fee when you'buy and sell, which is usually between 10 to $30. And ye the majority of REITs, they pay a good dividend on average between 5 and 10%. Investors have no other costs. You can participate in the appreciation of the properties and also get your dividend along the way. So if you're looking for income and exposure to property, I think it's a good way to get involved.

Phil: So with real estate investment trusts, do they actually operate the kind of businesses that they invest in, say like a healthcare reit, Would they be also doing the operations of the healthcare kind of businesses that are plonked on that property? And also the data center as an example, Are they operating the data centers as well or are they just providing the land on which these businesses operate?

Jack: Yeah, so uh, yeah, typically a REIT is just similar to a landlord. So uh, they're just buying the property and managing the property as well, like a landlord would do for a residential property. So uh, yeah, typically they don't run the business, they leave that to the experts and yeah, they just manage the property.

Phil: So what particular skills would they bring to it? I mean, I know for example in the logistics industry that there's been a lot of talk about the kind of warehousing that's required for logistics these days, where you've got to be close to ports and rail transport and all of those kind of things. Is that what the speciality of a REIT is, to find the best kind of land for the business that's involved?

Jack: Yeah, that's right. They'll have certain managers and buyers in the REIT team to look for the best properties in the sector that they're operating in. So uh, yeah, as you said, industrial properties in main cities now with the big tailwind of E commerce needing to be close to the customers, child care centreers is another hot sector at the moment. So uh, yeah, they'll look for the best places to buy those types of properties and then lease them out to operators? Typically.

Phil: Are there any other big differences between investing directly in property like you're saying most Australians love to do, as compared to investing in the real estate sector? On the asx, I think it's just.

Jack: The main difference to be the difference in the type of property. So uh, you're looking at commercial properties that you're invest in rather than residential. So yeah, you can look at the different tailwinds of each sector. Uh, say Data Centreers is obviously a big one at the moment with the amount of data required with the AI boom coming up at the moment. And I think it's mainly just the ease of the investing. As an investor it's more of a passive investment. You don't have to get involved, you don't have to hire your own property manager, uh, make decisions on when you're going to do renovations or refinance your mortgage or anything like that. So uh, you're investing in property and you're trusting the experts to look after your money there and yeah, try to make you some good capital gains and provide a good dividend on the way.

Phil: What's the relative performance been like between listed property and the rest of the asx?

Jack: Yeah, so it's interesting, it's actually being quite similar on a 10 year basis. Looking back with ASX 200 and the ASX 200 REIT index both returning around 8.7% annualized over the past 10 years. But in recent times the property index has been volatile due to Covid obviously and then inflation hitting and interest rates rising. But over the past two years it's actually uh, outperformed the ASX 200 with the Read Index returning 17% annualized over the past two years compared to 12% for the ASX 200. Although y, I would say that 2022 was a tough year for REITs when we did have that rapid interest rate rise because obviously this is the sector that's most exposed to interest rates due to the amount of that they take on to buy the properties.

Phil: And in terms of valuing a reit, it's quite different to valuing another company on the asx. What are the particular things that you use to value and find a value in the REIT sector on the share market?

Jack: Yeah, so there's probably two main things. First is looking at cash flow, which is similar to valuing a business on the asx. It's called funds from operation in the REIT sector. So basically the funds received after all costs of operations for the root. And then on the other hand you also have the property evaluations that you need to look at. So yeah, the first one, um, it'similar to valuing a business on the ASX is funds from operation or cash flow. So uh, obviously we say that all businesses or investments are valued on the future cash flows discount and back to today's present value. So uh, that's what we try and do with the roits. But you can also look at property valuations and

00:10:00

Jack: net tangible assets. So uh, net tangible asset is the assets they own minus the liabilities which gives you basically what you own as a shareholder per unit. And in recent times the NTA value has traded at a discount to what the rateits have been holding. So investors have been able to buy in at a discount to the nta.

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Phil: So what is the nta? Explain that to us.

Jack: So yeah, it's the net tangible asset value which is basicallyah the value of the properties they own in all assets. Assets in the REIT minus the liabilities. So the debt for example, which gives you basically it'like the equity you have in your home, um, house value minus, minus your liabilities.

Phil: Does that ever provide an opportunity to buy at a discount?

Jack: Yeah. So when we saw that rapid rate rise in 2022 and also obviously during COVID that they were trading at significant discounts, there was some reach trading at 50% discount to their NTA. So there was a good opportunity there for investors to buy at a significant discount. But there was concern that those valuations may continue to decline further uh due to the higher interest rate costs and the economic environment that was going on at the time and still is in.

Phil: Some ways so many, many times there's narratives in the share market that drive valuations. And one of the stories that we've heard over the last few years that's with the boom in work from home that office space is becoming less important to a lot of big businesses. Are you seeing that in the sector?

Jack: Yeah, absolutely. We've seen office valuations four significantly from when KBER first started. They'll be down greater than 25% I would say. But obviously it depends on the office that you're investing in. You have your Grade A offices in the CBD s nice office towers which may not have fallen as much as your fringe offices on the outer suburbs of the cities. So uh, it does depend on the office you are investing in. But it has played havoc across the whole sector. Ye and we are still seeing office valuations in recent times. So uh, it'll be interesting in the upcoming half uh year reports in February to see what office valuations have done in the past six months now that interest rates have stayed stable. And we have seen that the big corporations ordering people back into the office now so that could provide some stabilization for yeah, your a greatade properties in the CBD'who look after those big corporations.

Phil: And there's also the retail sector because there are so much shopping done online now that's also affecting the valuations in that particular part of the sector, isn't it?

Jack: Yeah, it's quite interesting there. When Covid first hit, the valuations there obviously declined quite significantly. Probably not as much as officers, but quite significantly. But since that reopening we've seen physical retail really bounce back. I know Centre Group, it's the largest listed retailer on the ASX as a reit. They own and operate the Westfields around Australia. The majority of Westfields, they've seen sales bounce back and be higher than they were pre Covid. Uh, so yeah, it's really bounced back there and the valuations have stabilized and started to rise again in that sector. Uh, and then you also have the smaller retailers like your smaller shopping centers which might be pegged by a large Woolworths and some other smaller shops. They've also been quite resilient as well. Your neighborhood shopping centers as people. Yah. Continue to shop at Woolworths and require those essential services.

Phil: So what's your favourite part of the sector and what are you looking forward to in 2025?

Jack: I think just the sector as a whole. It's quite interesting. It gives you a full overview of what's happening in the economy. You've got property in every sector reporting about what's happening with their tenants. Are, uh, sales improving, leases rising, what's happening with the valuations of the property. So yeah, it gives you quite the overview of what's happening in the Australian economy. So it helps when you're looking to invest in certain sectors as well. I think for FY25 we are expecting to see rates be cut. Yeah, we're not sure by how much yet really.

Phil: There's lot of pundits out there saying.

Jack: That they one or two or maybe not at all. But I think even if they

00:15:00

Jack: stay where they are at the moment, reach should perform well as valuations stabilise. We've seen some sectors start to rise in valuations again, like child care centreers and then we've seen earnings start to stabilize as well. And if you get any sort of rate cut there, you should see earnings rise again, likely in FY26 as interest costs come down a little bit. So I think it's set up for a strong year in 2025.

Phil: There's various areas of risk or various levels of risk in the stock market. Do real estate Investment trusts act a little bit more on the bond end of things as opposed to the business end of things.

Jack: Yeah, that's right. They're sometimes compared as a proxy to bond. So, uh, what type of yield can you get on a real estate investment trust compared to what the bonds are paying at the moment? So, uh, that does have a big impact on the share prices of the REITs. So you'll see if the yields on bonds are rising, you'll see the REIT prices decline as people shift their money towards bonds where they can get a better rate there. And it'll be seen as a more safer investment than investing in property.

Phil: And we use the term safer, uh, advisedly on this podcast. Yes, always past performance and all of that sort of stuff.

Jack: Yeah, it would depend on which bond you're buying.

Phil: Okay, so News Corp. Sometimes controversial company. And, um, you mentioned when you approached me about this, I never heard of the term sotp and I had to look it up. And it's some of the parts investing and you use News Corp as an example. So tell us about some of the parts investing and how it's displayed by a company like NewsRP.

Jack: Yeah, sure. So some of the parts investing, it can also be called the breakup valuation of a company or conglomerate. So, yeah, it's typically used when you have multiple business divisions within one company and it involves valuing each business within that company as if it was going to be broken up and sold as each part.

Phil: Uh, so what kind of company is this approach best used for?

Jack: Yeah, so it's most beneficial when you have a conglomerate, as I said, or a company with multiple businesses within that company. And it is best when you have different type of companies within that business. So, uh, they might be at a different maturity or growth stage. So the market's applying different multiples to each business and it's probably trading at aer low valuation than what the growth companies within that conglomerate would normally trade at. So that's normally where you can find the value if there's a hidden gem, as you may call it sometimes.

Phil: I've heard the term breakup value. Is that the kind of way of looking at this, that if you were just going to suddenly stop operating and break up these companies and sell them off, that they would. This is what their valuation would be?

Jack: Yeah, I think that's a very useful valuation to use. So you can look at the businesses within the company and you can try and find other businesses that have been sold recently, look at what multiple they've been sold on, and apply those to the business that you're trying to value as if it's going to be sold. And ye, it's especially useful when a conglomerate like News Corp has said we're looking to increase our valuation because we think it's undervalued. We're looking to create shareholder value here. You would have seen recently that they've sold Foxtel, which was announced just after Christmas, which was done at a good valuation higher than we had forecasts.

Phil: So, uh, sounds to me like they got out in the nick of time on that one.

Jack: Yeah, I think they've done well there. Their legacy businesses is still declining. They do have KO that the sports provider in Australia, but that's going to have a lot of competition coming up when the AFL and R rights come around again as the overseas streame is trying to the sports market. You've seen Netflix and to the NFL overseas and Amazon as well. So, uh, they could be coming to Australia and putting pressure on Foxtel and ko.

Phil: So with some of the parts investing, is that like having multiple spreadsheets with all kinds of different valuation methodologies for each of the particular businesses that all flow together into the one overall valuation?

Jack: It can actually be quite simple if you are just using the same multiple for each business, same type of multiple, like an EBITDA multiple which is earnings before interest, tax, depreciation andortization. So yeah, if you're using the same multiple for each business, you can just have it on one page of a spreadsheet and it can be quite simple for you to calculate. But uh, if we take News Courtp for example, they own REA Group, which is obviously real estate.com

00:20:00

Jack: here, a massive business, but that's also listed as on the ASX as well. So News Corp own 60% of RAA. You can use their share of the market cap of REA in your valuation or you could do your own DCF discounted cash flow to figure out what you think the valuation of REA Group is and use that in your some of the parts valuation.

Phil: So what have you particularly come up with on uh, News Corp in terms of valuing it overall?

Jack: Yes, so we've owned News Corp for over two years now and done quite well from it. I still think there's some good upside there. Obviously they have the REA Group which is the majority of the valuation of N Court, but I think they have a couple of hidden gems and the main one would be the Dow Jones company which produces the Wall Street Journal among other businesses. And I think that's been truly undervalued by the market. If you wanted to compare that to the New York Times, which is also listed on the US Stock Exchange, the multiple being applied to DW Jones within News Corp is significantly lower than what the market is applying to the New York Times, which I think they could be similar businesses and could demand a similar multiple. So uh, yeah, if Dow Jones was to be sold off, it could demand a much higher multiple and you would see significant uplift in the News Corp share price. Not that I think they would sell that business because it is, it's a high quality business. Uh, I'm sure Rupert would like to keep that one.

Phil: Yeah, I had a recent episode where I was talking to finance journalist in New York who worked on the digital transition and he said that they were very smart to apply a subscription model right from the early days on the Wall Street Journal.

Jack: Yeah, yeaheah. It's a great um, tool for finance professionals. So uh, everyone who's in the finance business in the us, even over here, we subscribe to the Wall Street Journal can be a great tool when you're looking for investments and what's happening in the business world.

Phil: So just give us an insight into some of the other businesses that operate under the News Corp banner.

Jack: Yeah, so they obviously have the legacy newspaper businesses. So News Corp Australia and News Corp uk. So you've got the Daily Telegraph in Australia, the Times in the uk, which haven't been performing as well and is probably dragging down the valuation of News Corp because they haven't quite made the digital switch that you were talking about that, that Wall Street Journal, New York Times may have. And they also have the book publisher, uh, Harur Colllin, which is one of the biggest in the world. I believe that's quite a good business.

Phil: So any other companies that we should be looking at in this umbrella?

Jack: No, we've mentioned REA Group, Dow Jones, they own a similar company to REA in the US called Move, but it doesn't have the monopoly like the REA Group does. So it nowhere near the valuation of REA. Yeah, Dow Jones, HarperColins and the legacy newspaper businesses as well are the main ones.

Phil: Some people have a problem with the News Corp company about, because of the particular, what do they call those special shares that the Murdoch family own that gives them outsized voting rights. Do you see this as a kind of a problem?

Jack: Yeah, I think in the past governance has probably been an issue at News Corp and it's still something we need to keep an eye on. But they have stated that they're looking to create sharedholder value here through spinning out businesses that may be reducing their valuation. And we have seen that with Foxtool. So I think they are on the right track. They've been performing a buyback over the past few years, buying back a lot of shares. So uh, I think they are doing the right thing by shareholders at present and from all accounts I think they'continue on this path into the future.

Phil: So what are your favorite methodologies to ensure a fair valuation of companies?

Jack: Yeah, I do enjoy some of the parts valuation obviously, but the main valuation we use is a discounted cash flow valuation. When we're valuing companies, which your viewers may be familiar with, it's basically forecasting all of the future cash flows in a company and discounting it back to today's value to come up with the present value of a company. To get technical.

Phil: No, it's okay. No, they get technical. But does it make a difference when a conglomerate has very different kinds of businesses as opposed to News Corp, which has kind of similar media assets across the business? I mean maybe where's Farmers have being a nice contrast to this for example?

Jack: Yeah, yeah it does. I think when we're performing the some of the parts, the majority of time you're using an EBITA or EIT multiple earnings before interest and tax and you're looking for

00:25:00

Jack: recent examples of acquisitions that have been made in similar businesses. So that would be the main thing you're looking at. But yeah, Westphers is a good example. They've got Bunnings, which is its own, a monster in itself. So yeah, I think you would find it difficult to find a comparison single to Bunnings. You might have to look overseas to a home um, Depot in the US or ye. Another business like that overseas. But yeah, they do have pharmaceutical business in West Farmers too which you could probably find recent acquisitions to compare that to and they only recently acquired that as well. So you probably have a fair multiple there too to go on as well.

Phil: So tell us about where you work. Oracle. How would you describe its place in the finance industry?

Jack: Ye so Oracle is a financial advisory group. We're up and down the east coast of Australia with around 60 plus advisors. But I work in the investment team which is a team of five and we run our direct share of portfolios and my job is to manage the emerging company'portfolio which is in small caps on the ASX and the REIT portfolio which we discussed earlier. So clients can direct invest directly with us into our portfolios and then we Will invest directly into companies or shares for the clients and manage those portfolios.

Phil: I like explaining how things work in the finance industry. So many people when they're say retiring or getting close to retirement will engage a financial advisor or an advisory service like Goacle and there will be investments made on their behalf. And one of the vehicles is as you mentioned before in sma which is separately a managed account, is that correct?

Jack: That's right, yeah.

Phil: And I mean I know I'm just getting into a little bit into the menu of how all of these things work but what is it about these kind of accounts that would be interesting and that that listeners should be aware of?

Jack: So I think the main difference between an SMA and a fund structure is when you're investing in an SMA you directly own the shares within the portfolio. Compared ah, to a fund where you would be buying units within that fund which have a price and then the portfolio manager there is buying shares owned uh, by the fund. At Oracle, if you're investing in the SMA's you get direct ownership and beneficial ownership of the shares that we are investing in.

Phil: And so there are many clients that want to invest that way rather than just going into a fund structure. Is that the case?

Jack: Yeah, yeah, yeah that's right. Clients are happy to invest that way. They're happy to look at their portfolio and see all the underlying shares they own. Gives you quite an extensive overview of the portfolio which you may not get with investing in a fund. So you know exactly what you own, how it's performed, where your dividends are coming from, things like that. Yeah, so yeah, quite happy with it.

Phil: Yeah. I've got a friend who's invests that way with another advisory group as well and it's interesting to see that he can actually look at his portfolio and get the overall picture of it and also each of those underlying investments.

Jack: Yeah, yeah, yeah it's good. I think it's quite easy to set up. Obviously I'm not involved in that process but from what, what the advisors say it's quite easy to get the clients invested into the portfolio.

Phil: I think it's um, for more of your hands on kind of investor, isn't it? Because I think there's many of people who'd rather play golf or fish.

Jack: Yeah, that's right. It depends, depends on the person you are. A lot of people wouldn't even look at the shares they own within it. They probably just want to see the top line performance. Uh, and that's fine too. But it gives the people who who would like to dig a bit further into it, some more transparency.

Phil: Great. Ok. So if, uh, people want to find out more about you, tell us where they can find you and where they can find Oracle.

Jack: Yeah. So personally, on m Twitter, I think that my handle is McGahn.

Phil: Jack, uh, days course, how long do we have to say formally saying twer we tweet?

Jack: Yeah. Do we x now is it tweet? And also on LinkedIn under my personal name, Jack McGann. And if you're looking to find out more about Oracle, we're also on LinkedIn under the name Oracle Advisory Group and also Oracle Investment Management. You can go to oracleag.com if you wanted to find out some further information on how to invest with us.

Phil: Jack McGann, thank you very much for joining me today.

Jack: Thanks for having me.

Chloe: Phil, thanks for listening to Shares for Beginners. You can find more at sharesforbeginners.com if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

00:29:59

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