ASX stocks in the real estate investment trust (REIT) space offer interesting opportunities, in my opinion. There are some attractive discounts to be found.
I think REIT discounts are fairly easy to identify. Deciding what price/earnings (p/e) ratio a company should trade at is an interesting question. Should a business trade at 20 times or 22 times its earnings? It's somewhat subjective.
REITs regularly disclose their underlying value to the market using either the net tangible assets (NTA) or net asset value (NAV) statistic.
We can only truly know a REIT's real NAV if the business tries to sell its entire portfolio. That's not likely to happen, so we must rely on the valuations by the independent valuers for a rough guide.
Let's examine three ASX stocks that look very appealing to me.
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Large valuation discounts
These REITs are trading at double-digit discounts on their assets.
The Rural Funds Group (ASX: RFF) 's adjusted NAV per unit as of 30 June 2024 was $3.14, so its shares are trading at a 34% discount to this.
The Centuria Industrial REIT (ASX: CIP) NTA was $3.87 per unit on 30 June 2024, meaning the shares are trading at a 19% discount to this value.
The Charter Hall Long WALE REIT (ASX: CLW) NTA was $4.66 per unit on 30 June 2024, implying that the shares are valued at a 16% discount to their underlying value.
If we can buy assets at a large discount to their underlying value, we give ourselves a bigger margin of safety.
Ongoing rental growth to help distributions
When investing in an ASX stock, I like to see that the business is growing financially — whereas a REIT can grow simply from an increasing flow of rental income.
Each of the REITs above has organic rental income built into their contracts with tenants. Some contracts have rental increases at a fixed rate, while others are linked to inflation.
Recent higher inflation has boosted inflation-linked rent, helping offset some of the pain of higher interest rate costs.
The rental growth of these ASX stocks can support current distribution levels and grow the payouts in the coming years.
Are interest rate cuts incoming?
REIT valuations and rental profits have suffered during this period of high interest rates.
The RBA has advised that interest rate cuts are unlikely in 2024, which may explain why REITs are still trading at large discounts. However, other countries are starting to cut their interest rates, including New Zealand and Canada.
In Australia, I think interest rates could start coming down in 2025, and this could be particularly helpful for the ASX stocks mentioned above.
I'd be willing to invest in Rural Funds, Centuria Industrial and Charter Hall Long WALE right now without rate cuts next year, but it could certainly help shareholder returns if that happened and helped close up the discounts.
