A rise in long-term bond yields in recent weeks whacked share markets down globally.
But yield-sensitive stocks like real estate investment trusts (REITs) were especially pummelled.
The S&P/ASX 200 A-REIT Index (ASX: XPJ), to demonstrate, is down nearly 7% since 29 December.
But individual stocks within the REIT sector were not treated the same, according to Pengana Capital fund manager Amy Pham.
"Consistent with market trends, the steepening yield curve favoured 'value' stocks such as Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) over 'growth' stocks such as Goodman Group (ASX: GMG) and Charter Hall Group (ASX: CHC), despite the divergence in fundamentals witnessed over the reporting season."
The reporting season for REITs was a real "mixed bag", she said.
"The majority of REITs provided earnings guidance, with the exceptions being the large retail REITs such as Vicinity, Scentre, and Unibail-Rodamco-Westfield (ASX: URW).
"A number of REITs provided upgraded financial year 2021 earnings guidance, including GMG raising its FY21 year-on-year guidance by 3% and CHC increasing its FY21 guidance by 4%."
Rotation to value shares have gone overboard
Pham's team believes the rotation to value shares has gone too far and they've now "overshot valuations".
"Scentre, for example, since rebasing its distribution to 14 cents per share, is now yielding 5% (instead of 8% on FY19 distributions) and is no longer attractive compared to its REIT peers," Pham said.
"Goodman and Charter Hall, however, which have historically traded at premiums to the market PE, are now trading at discounts."
Pham urged ASX REITs to now sell off assets to reduce debt.
"This is the time REITs should deleverage their balance sheets to drive earnings growth through acquisitions or developments."
2 REITs Pham likes, and 2 she doesn't
Already Pham's found Goodman and Charter Hall, whose shares are going for cheap, have the strongest balance sheets, with less than 5% gearing.
"They both have strong development pipelines with structural tailwinds driving future demand."
She cited how Goodman has $8.4 billion of work-in-progress, which is almost double the prior year. Charter Hall has shown its ability to grow funds under management at 30% each year.
"[It] has high recurring fees (no performance fees included in the guidance), a diversified portfolio with a long WALE (weighted average lease expiry) of 9.1 years, and is best placed to grow in the alternatives sector and participate in sale & leaseback transactions."
Thus Pham's team is much preferring those two 'growth' businesses, as opposed to 'value' REITs like Scentre and Vicinity.
"We see continued earnings pressure for large retail REITs — SCG and VCX — with poor operating matrices (significant negative leasing spread of -12 to -15%, sales moving annual turnover of -18%, and low earnings visibility) along with the continued structural shift to online retailing putting pressure on valuations."
