Down -22.32% year-to-date, Australia’s REIT sector is expected to lose profits over the next three years due to rising interest rates, and in light of higher borrowing costs, some brokers have reduced price targets by an average -15%.
But despite the current investor distaste for the sector at large, Goldman Sachs reminds investors that not all REITs were born equally and has identified two defensive plays worth keeping on radar.
As an owner/manager of affordable independent living residential land lease communities, Goldman's believes this S&P/ASX 300 company is ideally placed to capitalise on the housing needs of Australia’s ageing population and the structural growth in land lease living.
The stock has fallen -33% year-to-date and is currently trading at a 43% discount to the broker’s target price of $24.65.
Despite house price declines, Goldman's expects a favourable pipeline and inventory position, plus a strong value proposition for incoming homeowners to provide near-term pricing support for Lifestyle Communities.
Despite a rising rate environment, Goldman’s continues to see valuation support for lower or maintained cap rates across the Australian land-lease sector and expects to see spreads decline.
The broker is attracted to the company’s low-risk, annuity rental income and believes residential land lease communities (RLLC) are becoming an institutional-grade property sub-sector.
This sector is experiencing growing demand, especially from offshore institutions and pension funds.
At the half year, the company delivered net profit after tax (NPAT) of $27.5m, compared to $14.1m in the same previous period, and declared an interim fully franked dividend of 4.5 cents per share (CPS), up from 3 CPS paid for the same previous period.
The company reaffirmed its plans to deliver 1,100 to 1,300 new home settlements and 450 - 550 resale settlements between FY22 and FY24.
Goldman’s believes Qualitas provides defensive exposure to the private markets super cycle and has initiated coverage with a Buy rating.
The stock is currently trading with 46% upside to the broker’s target price of $3.00.
To the uninitiated, Qualitas operates in the alternative real estate investment management sector, managing funds investing in debt and equity strategies.
The company earns three types of fees: Performance, co-investment returns, and base management fees.
The company partners and invests with high-quality property developers and owners across credit and equity strategies in the commercial real estate sector (CRE) sector, and since inception, has delivered a 15.8% internal rate of return (IRR) for investors.
Since the company was founded in 2008, funds under management (FUM) have grown at a 36% compound annual growth rate (CAGR) to $4.2bn at first half FY22, and Goldman’s expect it to reach $6.6bn by FY25.
Unlike a lot of stocks within the REIT sector, Goldman's believes the group is positively leveraged to rising interest rates which increases debt fund returns, boosting performance fees and attracting more capital.
Based on the group’s strong net cash position ($0.87ps FY22), limited exposure and no recourse to underlying fund performance, Goldman’s sees Qualitas as a low-risk exposure to the CRE sector.
With FUM inflows and deployment driving annuity-style management fees, the broker is forecasting 46% FY21-24 earnings per share (EPS) CAGR.
“We believe the current share price implies zero value for performance fees, co-investment returns, a full write-down of balance sheet investments and highly discounted FRE value,” the broker notes.
Qualitas listed on the ASX mid-December last year, after a successful $335m IPO, and has a market cap of $476m.
Since then the share price is down -35.20%.
FY22 capital deployment is forecast to be no less than $1.70bn, representing an increase of 16% on the prospectus forecast of $1.47bn.
FY22 statutory net profit before tax (NPBT) is forecast to be no less than $23m representing an increase of 14% on prospectus forecast.
The company has reaffirmed its FY22 dividend per share (DPS) of 4 cps and 3% dividend yield on the offer price.
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