1 ASX small-cap stock that could benefit from the rental crisis

Noticed the rental market shortage? This may be an opportunity for this ASX small-cap share.

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Australia's rental market is in a frenzy, with skyrocketing prices and tight supply leaving many scrambling for solutions. As housing affordability issues continue to plague the housing market, the rental crisis has become a significant concern for tenants.

But for savvy investors, this crisis may present a golden opportunity.

Aspen Group Limited (ASX: APZ) is one ASX small-cap stock that might benefit from the ongoing housing crisis. Let's explore.

Focus on affordable housing sector

Aspen Group specialises in affordable housing and accommodation solutions. The company owns more than 5,000 approved dwellings and land sites across Australia.

It offers affordable living options such as rental properties, retirement villages, and holiday parks, making housing accessible to a wide range of people. The company explains its business model:

Our core customer base is the approximate 40% of Australian households that can afford to pay no more than about $400 per week to rent or $400,000 to purchase their housing needs.

The shortage of accommodation at our end of the market has become even more acute over recent years with the proportion of rentals offered nationally at less than $400 per week collapsing from 42% in 2020 to only 16% in 2023.

Aspen Group generates revenue from two main sources: rental income and property development and sales. Its underlying net operating income (NOI) from these sources grew significantly, increasing from $5 million in FY19 to $21 million in the last 12 months to December 2023.

These NOI figures are different to the statutory net profits after tax (NPAT), which reached $50.8 million in the last 12 months. The higher NPAT is primarily due to revaluation gains on properties, estimated at around $47 million, reflecting the market value increase of these properties, which can vary each year.

According to Aspen's 1H FY24 report, the rental market remains strong. Aspen's total portfolio rent rose 13% year-over-year to $314 per week per dwelling. Notably, residential rent jumped 18% to $342 per week per dwelling, surpassing the market average growth of 16%.

Another important axis of growth is strategic acquisitions. The company continuously looks for acquisition opportunities to expand its portfolio and enhance its revenue potential. By acquiring properties that fit its affordable housing model, Aspen can scale its business and increase market reach.

Most recently, Aspen Group tried to acquire Eureka Group Holdings Ltd (ASX: EGH). Although its takeover offer wasn't successful, Aspen still owns a strategic stake of 36% in Eureka Group. The value of this stake represents approximately 8% of Aspen's total assets.

FY25 profit guidance upgrade

Aspen remains upbeat about the future.

Recently, the company increased its underlying earnings forecast for FY24 to 13.5 cents per security (cps), the upper limit of its previous guidance. Additionally, it issued profit guidance for FY25, projecting underlying earnings to be between 14.5 cps and 15 cps, representing a 9% growth from FY24 at the midpoint.

The residential market is in short supply, especially for affordable housing, which management expects to continue. The company noted:

Aspen's residential and lifestyle portfolios are essentially full and 3-month forward bookings for our parks portfolio are 18% ahead of the same time last year.

Rents are growing strongly yet remain affordable and competitive at an average of about $365 per week for residential dwellings and $190 per week for lifestyle land sites. We enjoy a high-quality tenant base and negligible arrears.

How cheap are Aspen Group shares compared to peers?

Aspen Group shares are trading at 12 times FY25's estimated earnings. Comparing Aspen Group to other similar companies in the real estate sector based on earnings estimates provided by S&P Capital IQ:

  • Ingenia Communities Group (ASX: INA) share price is valued at 19x FY25 estimated earnings
  • Lifestyle Communities Ltd (ASX: LIC) share price is valued at 16x FY25 estimated earnings
  • Eureka Group share price is valued at 16x FY25 estimated earnings

Aspen Group shares offer a distribution yield of 4.7% based on trailing 12 months' payments. The company anticipates paying out 9.5 cps as distribution in FY25, representing a 5.3% yield at the current security price.

Foolish takeaway

I think Aspen Group shares offer an interesting opportunity to benefit from rental shortages in Australia.

At $1.79, the Aspen Group share price has moved sideways, trading 0.5% lower than it was 12 months ago but up 6.5% in the year to date.

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Aspen Group. The Motley Fool Australia has recommended Aspen Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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