Rudi’s View: Selective Opportunities Among Discounted REITs

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Mar 20 2024

In this week's Weekly Insights:

-Selective Opportunities Among Discounted REITs
-Conviction Calls & Best Buys

By Rudi Filapek-Vandyck, Editor

Selective Opportunities Among Discounted REITs

Central bankers will lower interest rates, though the exact timing remains unknown. Bond markets will try to anticipate these reductions and rally in advance, lowering bond yields as a result.

Bank shares in Australia have rallied hard and many suggest today's share prices are unwarranted given the weak fundamentals that dominate the sector, including a benign outlook 18 months out.

That other source for regular investment income, A-REITs listed on the ASX, is still offering securities trading at a discount to underlying asset values. No double-guessing why the local REITs sector remains on many an investor's radar.

In February, REITs as a group outperformed the broader market by no less than 4.3% (returning 5.1% against 0.8% for the ASX200).

As per always, the devil hides into detail, as the sector is operating under a cloud of ongoing threats, headwinds, (valuation) traps, and challenges.

Bond yields might be below last year's peak, but they are still high and for many REITs the costs from carrying debt is restricting how much can be paid out to shareholders.

Many in the sector are effectively ex-growth, for the period ahead, as price inflation, devaluing assets and polarising consumer spending offer additional negatives.

In some cases, asset sales are the only way out of the stasis.

One additional factor to keep in mind is that while your average REIT is trading at a discount to implied asset valuations, the general consensus is there will be further asset devaluations occurring in the year ahead, though maybe not as large as is currently priced in.

Post the February results season, which offered positive surprises, led by sector-leader Goodman Group ((GMG)), as well as predictable disappointments, we run through updated sector assessments by those analysts whose daily job revolves around REITs and investing in them.

Evans and Partners

Sector analysts at Evans and Partners thought Goodman Group dominated the good news delivery in February while the rest of the sector was mostly treading water.

There is no doubt in the analysts' mind, the sector offers great opportunities longer term, though investors generally might hold off for a while longer until more clarity exists around where bond yields and central banks cash rates are heading, and exactly when.

Evans and Partners likes to highlight the specialist players in the local REITs sector, with the broker's Top Three Favourites post February being Arena REIT ((ARF)), Dexus Industria REIT ((DXI)), and Waypoint REIT ((WPR)).

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