Broking Good: Jarden's ASX REIT ratings hint at brighter days ahead

ASX’s top REITs have outperformed broader market in 2024
Themes emerging include rising demand for data centres and falling office values
REITs are preparing for tougher conditions in FY25 but expect future growth

Despite declining valuations and higher financing costs, Australia’s largest REITs (real estate investment trusts) have significantly outperformed the broader market in 2024.

Goodman Group (ASX:GMG) has been a standout performer, with its stock price rising by 30% this year, driven by strong demand for data centres which has boosted its project pipeline.

HMC Capital (ASX:HMC) also saw impressive returns, up 33%, securing second spot behind Goodman.

Overall, the ASX 200’s REIT sector (ASX:XPJ) delivered a 15% total return YTD, compared to the ASX 200’s 6% gain.

Two key trends have emerged – a sharp drop in office tower valuations and a surge in demand for data centres.

In contrast, traditional real estate sectors, like residential property, faced difficulties, with companies like Mirvac (ASX:MGR) experiencing negative returns and struggling with low demand. Mirvac is down 2% this year.

What we saw this earnings season

Last week saw a flurry of results from Australian REITs, with over ten companies reporting their financials.

The overall trend continues, with many REITs expecting to hopefully hit a trough for Net Tangible Assets (NTA) and Funds From Operations (FFO) in FY25.

Companies are facing more realistic negative revaluations and are preparing for increased Weighted Average Cost of Debt (WACD) pressures in FY25, aiming for FFO growth to return in FY26 and beyond.

Asset recycling is a key theme, with many REITs selling assets to strengthen their capital structure or to reinvest in growth initiatives like acquisitions, developments, or buybacks.

Meanwhile, BBSW futures and three-year swap rates, the key benchmarks for funding rates, are showing a more positive outlook.

For REITs, this typically means lower borrowing costs, which can reduce their interest expenses and increase property valuations.

Jarden’s ratings on ASX REITs

Here are investment and advisory firm Jarden’s detailed updates on each REIT based on those recent results.

This overview focuses on the REITs that have received a positive rating from Jarden.

Note: FFO or Funds From Operations is probably the most crucial metric for REITs because it measures the cash generated from their core operations, excluding non-cash items like depreciation and gains or losses from asset sales.

This metric provides a clearer picture of a REIT’s operational performance and its ability to generate income from its property assets.

Investors often use FFO to evaluate a REIT’s financial health and its capacity to pay dividends, as it reflects the cash available for distribution to shareholders more accurately than net income.

Meanwhile, an “Overweight” rating indicates that the analyst expects the stock to perform better than the average or expected performance of its sector over a specific period.

Essentially, it suggests that the analyst believes the stock has a higher potential for growth compared to its peers.

A “Neutral” weighting, on the other hand, indicates that the analyst believes the stock is expected to perform in line with the overall market or its sector.

It suggests that the stock is neither a strong buy nor a strong sell.

Region Re (ASX:RGN) – OVERWEIGHT

The price target is revised down to $2.45 (current price $2.26), a 2% decrease, due to ongoing WACD headwinds and one-off costs, but partially offset by improving top-line growth and operating leverage.

FFO estimates for FY25, FY26, and FY27 are reduced by 2.2%, 4.6%, and 1.3%, respectively.

The outlook is improving despite recent underperformance, said Jarden.

Lifestyle Communities (ASX:LIC) – OVERWEIGHT

The 12-month price target is cut to $11.00 (current price $8.20), a 6% decrease, due to settlement risks and cost inflation concerns.

FFO estimates for FY25, FY26, and FY27 are adjusted by -3.2%, -1.8%, and +9.3%.

Management is addressing these challenges, and earnings could recover as settlement volumes increase.

Charter Hall Social Infrastructure REIT (ASX:CQE) – Upgrade from NEUTRAL to OVERWEIGHT

The price target is raised by 1.8% to $2.80 (versus current price of $2.73), driven by an attractive industry structure and active management.

FFO estimates for FY25, FY26, and FY27 are adjusted by -8.8%, +0.8%, and +2.1%.

The stock’s recent underperformance appears overdone, making the risk-reward look appealing, says Jarden.

HomeCo Daily Needs REIT (ASX:HDN) – OVERWEIGHT

The price target stays at $1.40 (versus current price of $1.28).

FFO estimates for FY25, FY26, and FY27 are updated by -2.6%, -0.5%, and +0.1%.

The REIT is managing WACD headwinds effectively through asset recycling, with an attractive risk-reward profile.

Arena REIT No 1 (ASX:ARF) – OVERWEIGHT

The price target remains at $4.30 (versus current price of $3.94).

FFO estimates for FY25, FY26, and FY27 are stable at +0.0%, +0.4%, and +1.0%.

ARF’s capital structure is solid, and the growth initiatives could help surpass initial FY25 guidance, despite a premium valuation.

Charter Hall Retail REIT (ASX:CQR) – OVERWEIGHT

The price target remains at $3.90 (versus current price of $3.58).

FFO estimates for FY25, FY26, and FY27 are updated by -8.7%, -3.7%, and -2.1%.

CQR’s decision to bring forward WACD headwinds could set the stage for better FFO growth from FY26, with a strong valuation at a 21% discount to new NTA.

Abacus Storage King (ASX:ASK) – NEUTRAL

The 12-month price target remains at $1.30 (versus current price of $1.22).

The REIT’s FFO estimates for FY25, FY26, and FY27 are adjusted upwards by 0.9%, 1.8%, and 7.8% respectively.

ASK has provided a solid operational update, benefiting from strong portfolio performance and sector tailwinds.

Despite some softness in FY25 guidance, the risk-reward seems balanced, given the stock trades at a 21% discount to updated NTA, said Jarden.

Goodman Group (ASX:GMG) – NEUTRAL

The price target stays at $37.60 (versus current price of $32.79).

FFO estimates for FY25, FY26, and FY27 are adjusted by +0.0%, +0.9%, and +2.6%.

GMG’s results were consistent with expectations, and its growing pipeline and strong returns are key attractions, though concerns about risk remain.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.

The views, information, or opinions expressed in this article are solely those of the broker and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.