Real Estate

Goldman Sachs retains nine Buy ratings within its A-REIT’s coverage

By Market Index
Fri 02 Sep 22, 12:48pm (AEDT)
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Key Points

  • Year-to-date the REIT sector is down around -19%, underperforming the broader ASX200 index by 13%
  • Goldman’s has downgraded Vicinity Centres (ASX: VCX) to Neutral from Buy
  • While Healthco’s (ASX: HCW) FY23 guidance came in 13% below expectations, the stock has outperformed the S&P/ASX200 A-REIT index (XPJ) by 11% since reporting

While year to date (YTD), the REIT sector is down around -19%, underperforming the broader ASX200 index by 13%, Goldman Sachs still maintains nine Buy ratings on the 17 stocks within its coverage.

However, despite the performance YTD, the broker notes the index has moved from its trough in mid-June and nominal bond yields are below recent highs (although have risen through August).

Here are some of the highlights from Goldman’s most recent coverage of the sector.

Retained cash flow and dividend sustainability

Given external factors, such as weakening growth and tighter funding costs, Goldman’s believes there will be an increased focus on sustainable dividends, payout ratios, and retained cash flow to fund external growth.

“Those A-REITs that retain more cash flow have a relatively higher funding advantage over those that require more external capital to fund acquisitions and development projects,” the broker notes.

“A-REITs with a lower starting payout ratio have the ability to increase dividends over time, in our view.”

Guidance surprise

Across the broker’s coverage, relative to pre-result earnings estimates, REITs providing FY23 guidance ahead of expectations included:

REIT's with guidance the furthest below expectations included:

Interestingly, while Healthco’s FY23 guidance came in 13% below expectations, the stock has outperformed the S&P/ASX200 A-REIT index (XPJ) by 11% since reporting.

In Goldman’s view the REIT’s outperformance can be attributed to greater clarity around longer-term development pipeline, its net cash position, providing flexibility, an announced share buyback, and flat DPS with a pathway to being cash covered.

Share buybacks

Given the valuation disconnect between listed and direct real estate, a number of companies have initiated share buyback programs, and Goldman sees the possibility for share buybacks for those REITs trading below NTA with a strong capital position including:

Vicinity Centres downgraded to Neutral

After outperforming the A-REIT index by 33% YTD on the back of an improved operating environment and increased cash collections driving higher property income (NPI), lower waivers and provisions and improved ancillary income, Goldman’s has downgraded Vicinity Centres (ASX: VCX) to Neutral from Buy.

While Vicinity is trading at a 19% discount to book, the broker believes the REIT offers a potential 12-month return of 15% (at a revised target price of $2.09) which is below the broker's REIT coverage average of 19%.

Vicinity Centres share price over 12 months.

Preferred retail mall exposure

Given it owns a number of the top 30 malls in Australia, with a more productive portfolio and strong earnings growth outlook - trading at a 20% discount to book value – Goldman’s top pick in retail malls is Scentre Group (ASX: SCG).

The REIT introduced earnings guidance of more than 19.0cps, implying at least 14.2% earnings growth in FY22.

While Goldman’s acknowledges the debt headwind in the second half due to rising rates, the broker notes Scentre increased its interest rate hedging to 80% in second half FY22 at an average hedged rate of 1.99%, reducing the potential headwind.

The broker also notes:

  • Roughly 80% of annual lease reviews are on CPI+2%, a benefit in 2H22 (& in FY23) given elevated inflation

  • Over 50% of the leases typically roll at the back half of the year, providing upside to NPI growth if sustained levels of inflation persist.

The broker sees a potential 12-month total return of 25% at a $3.50 12-month target price and maintains Buy rating.

Sub-sector overview

Industrial: Goldman’s has a positive view of the industrial sector, with a number of favourable fundamentals underpinning future long-term demand for industrial space.

The broker expects solid rental growth as demand for high quality logistics space continues to outpace available supply.

Office: Goldman’s believe the bifurcation of prime and secondary office assets will continue, and this was echoed by a number of the large office landlords over earnings season.

Retail: . Although concerns remain longer-term about the potential impact to the consumer given the evolving macroeconomic backdrop, Goldman’s notes the myriad factors at play in the current environment and expect to see a further normalisation in the retail environment in the near-term.

Residential: The broker believes the Australian residential market is cycling tough comps as headwinds are set to intensify as rising interest rates, higher input costs, and ongoing supply chain constraints impact residential activity.

Alternative: Goldman’s continues to hold a positive view of the childcare/social infrastructure, healthcare, and fuel and convenience sub-sectors.

The broker also remains attracted to the resilient and transparent cash flows underpinned by predominantly triple net lease structures to strong tenant covenants.

Summary of reporting versus performance across Goldman Sachs coverage



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