Weekly reports | 03 Sep 2021
Weekly Broker Wrap: Market Conditions Favor Alternative REITs, Time to Reallocate Valuable Assets, Banking Sector Income Under Pressure
-The Delta variant is not a brake on the solid growth of the rents of alternative REITs
-Remergence of value investing to reflect the resumption of the recovery
-Banks to execute $ 26 billion in rolling buyouts over next two years
By Mark Story
FPI: the alternatives shine
Due to key defensive features including long term leases for essential services with minimum short term lease expiries, sharp rent increases and government support for operators, alternative REITs (real estate investment funds) saw minimal impact from covid, and Goldman Sachs expects similar results through the end of 2021.
Despite the current economic backdrop, Goldman Sachs doesn’t expect the impact of a slight hike in the Delta variant to derail what has been solid rental growth. Three factors explain the broker’s optimistic outlook for a handful of alternative REITs.
First, they have strong balance sheets with capital to deploy, which can make it easier to find acquisition opportunities, especially in light of the high asset prices in the market.
Second, the broker believes that positive asset valuations highlight the underlying resilience and cites recent asset valuations in child care, healthcare, hotel and land rental communities. (RLLC), which have been supported by strong investor demand and continued compression in capitalization rates.
Then there is RLLC housing which, according to the broker, currently enjoys strong structural and economic growth dynamics, including an aging population and relatively low interest rates. In addition, Goldman adds, real estate market conditions are favorable and a further contraction in cap rates is supported by low-risk rental income from annuities.
Based on these dynamics, Goldman Sachs’ top buy recommendations remain Charter Hall Social Infrastructure ((CQE)), Lifestyle Communities ((LIC)) and Waypoint REIT ((WPR). The broker remains rated Sell on National Storage REIT ((NSR)) due to settlement and sales risks in the first half of fiscal 22 with restrictions pending in Melbourne.
Goldman expects Charter Hall Social Infrastructure to invest capital in social infrastructure assets based on its broad mandate and leverage capacity: $ 207 million in FY 21. The broker notes that well As childcare assets remain the REIT’s main preference, the fund is executing its strategy of expanding its investments in social infrastructure, with management planning to target 30-50% exposure outside of childcare. children.
Goldman estimates that an additional $ 150 million in acquisitions will leave the REIT’s leverage below the midpoint of its 30-40% target debt range. The REIT is currently trading at a 14% premium over its net tangible asset value (NTA) over its historical average premium of 13% (since 2014), and the broker’s target of $ 3.81 implies a total yield of 8%.
Turning its focus to lifestyle communities (target price of $ 21.60), Goldman Sachs estimates that a strong 3-year forecast for new housing settlements for FY22-24 and deferred management fee resales (DMF) are expected to result in a substantial increase in annuity rents and long-term DMF income – both of which are high multiple income streams.
The broker also expects an increase in the credit facility from $ 100 million to $ 375 million to allow for further property acquisitions, accelerate the pace of new housing settlements and therefore result in higher rent and lower costs. DMF annuity.
The upgrade of credit facilities, coupled with the recent acquisition of a site in Cowes (Phillip Island), gives the broker greater certainty as to the ability of the REIT to increase its speed of development. While Goldman sees some risk around settlements and sales in the first half of FY22 with restrictions ongoing in Melbourne, the broker expects a strong rebound after foreclosure as seen previously.
Meanwhile, Goldman believes Waypoint’s first half of fiscal 21 result (target price of $ 2.95) reaffirms the broker’s positive outlook on the REIT and gas station industry, with its revenue streams. visible and constant.
Having disposed of numerous non-core assets during the period, Goldman Sachs believes that the REIT has sufficient resources to undertake future initiatives and / or finance potential acquisitions.
While forecasts do not allow any acquisitions in FY21, management has indicated a planned $ 150 million of capital management initiatives, including a $ 75 million insider buyout. Management also hinted at the possibility of potential return on capital in the fourth quarter of FY21.
The broker notes that the minimum maturities of short-term leases help the REIT to reiterate its forecast for fiscal year 21 of 3.75% growth in distributable earnings per share.
Asset allocation: don’t give up value investing right away
While the dramatic return of value-style investing last November gave way to a resurgence of the growth style six months later, thanks to the tech sector reaffirming its leadership in performance, Wilsons believes this to be a mistake. cancel the first one for now.
The return to growth was helped by the further decline in bond yields, as well as fears of a return to stalled economic normalization as the delta variant led to the re-emergence of the number of covid cases around the world. .
But assuming the above-trend growth seen over the past 12 months continues, as the economic reopening continues and pent-up household demand is released, the broker expects the recent drop in performance of value is reasonably short.
Overall, Wilsons expects the path to recovery over the next 18 months, while unlikely to be perfectly smooth, will support another decent outperformance for value investors. . With vaccines proving to be the main driver of a return to economic normalization, the broker expects Australia to return to recovery before the end of the year, with a year of strong growth in reserve for 2022.
Wilsons also believes slow demographic trends, including the continued aging of the world’s population and slower growth in the working-age population, are creating headwinds for growth. In the absence of a surprisingly strong wave of productivity, the broker finds it difficult to become overly optimistic about the prospects for global growth over the next 5-10 years.
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