The AREITs best placed to maintain pricing power and grow earnings

Amy Pham

Pengana Capital Group

In an inflationary environment with rising interest rates, our focus has turned to which stocks and sub-sectors are best placed to maintain their pricing power and grow earnings.

Fund managers such as Goodman Group (GMG), Charter Hall Group (CHC), and Centuria Group (CNI) remain our top picks for a number of reasons:

1) After a rebasing in share prices, where most fund managers have fallen as much as 20%, we see this as buying opportunity. CHC is now trading on a ~16x earnings multiple, below the average for the AREIT sector. We believe CHC and GMG are candidates to upgrade FY22 guidance at the upcoming results. We forecast CHC’s earnings growth to be 15% through to FY24, underpinned by AUM growth and margin expansion as incremental FUM is being added at a very high margin.

2) Tailwinds continue for the logistics sector driven by global e-commerce demand. GMG, with a development book of $12.7bn combined with very high and growing margins (~60% on developments given the 250bps spread between yield-on-cost and market cap rates) should drive significant growth in development earnings as the projects are delivered. This flows through to AUM growth and performance fees providing us with confidence and visibility of future earnings growth.

3) The structural shift into alternative assets will benefit CNI. Having grown AUM to over $20bn through the acquisitions of Heathley Healthcare (2019), Augusta Capital (2020), and Primewest (2021), CNI now has one of the highest exposures to alternative sectors. In Australia, alternative assets only represent 6% of the AREIT index compared to more established markets such as the US and UK where they represent more than 50%. We believe as the structural headwinds remain for discretionary retail from online retailing and the work from home (WFH) thematics for office, alternative assets – being driven by secular trends, and hence less cyclical – will provide both earnings certainty and capital growth for investors.

4) On a macro view, with the anticipated economic slowdown underway and the risk of moving towards a downturn, we expect this will result in a flight to defensive asset classes such as REITs. This is likely to be supportive of real asset values and deployment of capital into the sector, which will aid fund managers. The risk is another shift higher in yields, although the current spread between asset yields (average at 4.5%-5.5%) and the cost of debt (average of 2%) is generally attractive and supports asset valuations and further M&A in the sector.

Based on valuation, the sector is trading on a forecast FY23 distribution yield of 4%, providing a 200 basis points gap to 10-year bonds, and an attractive three-year EPS growth of 6%.

Learn more

More information about Amy's fund can be found here. Watch the fund's latest webinar here, or contact us to learn more about the Pengana High Conviction Property Securities Fund.

Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana High Conviction Property Securities Fund (ARSN 639 011 180) (the “Fund”). A product disclosure statement for the Fund is available and can be obtained from our distribution team. A person should obtain a copy of the product disclosure statement and should consider the product disclosure statement carefully before deciding whether to acquire, or to continue to hold, or making any other decision in respect of, the units in the Fund. This report was prepared by Pengana Capital Ltd and does not contain any investment recommendation or investment advice. This report has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on any information contained within this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Neither Pengana Capital Ltd nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in, the Fund.

3 stocks mentioned

Amy Pham
Fund Manager - Pengana High Conviction Property Securities Fund
Pengana Capital Group

Amy is portfolio manager of the Pengana High Conviction Property Securities Fund, and has over 20 years of property funds management experience. Previously, Amy has worked at Charter Hall/Folkestone for 6 years, managing a high conviction...

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