Plenty of S&P/ASX 300 Index (ASX: XKO) stocks have been strong performers over the last year or two. It's getting harder to find good value, but there are some sectors that could still be attractive opportunities.
One of the hardest-hit sectors over the last two and a half years has been the real estate investment trust (REIT) industry. REITs usually have a lot of debt on their balance sheets, so the higher cost of debt has been painful.
The higher rates have also hurt the valuations of various commercial property sectors.
I often like to hunt for opportunities in beaten-up sectors because there may be some hidden contrarian opportunities that can bounce back. Below, I'm going to look at two REITs that are trading at large net asset value (NAV) discounts.
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Charter Hall Retail REIT (ASX: CQR)
It owns a portfolio of shopping centres and service stations around Australia.
Sometimes, it can be difficult to say whether a company should be trading at 18x or 20x their earnings. However, it can be simpler for REITs. In every result, the REITs publish a NAV or net tangible asset (NTA) figure. It's up to investors to decide how much confidence they have in that NTA figure, but in my view, the global trend of interest rate cuts could help REIT share prices over the next year or two.
Charter Hall Retail REIT reported an NTA of $4.51 as of 30 June 2024, so there is apparently a 21% discount at the moment.
But, the business is seeing rental income growth, despite the challenges of e-commerce. There is not much space in our cities for large shopping centres, so they may not be as challenged as some investors may think.
In FY24, the ASX 300 stock reported like-for-like net property income (NPI) growth of 3.6%. It's expecting positive leasing spreads (rental growth) and high occupancy levels to deliver like-for-like NPI growth in FY25. Direct and indirect inflation-linked rental growth "will also underpin asset values" according to the business.
For FY25, the business is guiding its distribution yield will be at least 6.9% based on a distribution forecast of at least 24.7 cents per unit.
Centuria Office REIT (ASX: COF)
This is one of the largest REITs with a focus on office buildings.
There has been much commentary on the difficulties faced by office buildings due to the shift of many workers working from home.
In the FY24 result, the business reported another decrease in its NTA to $1.80, reflecting the sector's pain. But even at this level, the Centuria Office REIT share price is at a 28% discount to the NTA.
The ASX 300 stock has been working hard on some of its weak points. It has addressed the significant FY25 expiries – around 72% of leases now expire in or after FY27.
It has also refinanced $862 million of debt, so now no debt is expiring before FY28.
The business now has a portfolio occupancy of approximately 93%, with a weighted average lease expiry of 4.3 years. According to Centuria, it is expecting overall office supply to diminish, with projected replacement costs to build new office buildings above the ASX 300 stock's "current and implied portfolio values".
It is guiding that it will pay an FY25 distribution of 10.1 cents per unit, which translates into a forward distribution yield of 7.8%.
