Sharemarket bargain hunters see opportunities in private credit and property trusts

Tariff mayhem means private credit funds and real estate investment trusts are selling at decent discounts. Here are the best ones for long-term investors to make an opportunistic play.

Artists impression of 1 Mill Street by GDI Property Group

A relatively new and little-understood sector for retail investors that attracted a lot of investment has been private credit. The simultaneous winding down of the local bank hybrid market has created a frenzy of income-seeking activity. However, with recent market turbulence, some of these investments have been sold off harder than the broader market.

The listed property sector, known as real estate investment trusts, have also been out of favour with investors in the recent sell-off. But with many private credit and REIT investments now trading at a discount to net tangible assets, now may be a good time for long-term investors to make an opportunistic play in these assets.

Small cap fund manager Tim Canham with Balmoral Investors believes there are winners and losers with the tariff issue front of mind for investors at present:

“It’s quite clear tariff disruption is causing volatility in global markets, and one of the key issues for investors is to ask is whether the practice of producing goods in low-cost countries and exporting them to the US is still viable in a world with high tariffs?

“I would be wary of stocks that have clearly benefited from that model, which are mainly in the consumer-related sectors,” he said. “And in terms of opportunity, property stocks where tariffs in the main have no direct impact are worth a look as they have been sold off strongly.”

Some of the discounts on offer this week appear quite compelling. Take GDI Property Group, for example. It pays an 8 per cent dividend and if you buy this stock you gain an exposure to 18 commercial properties that are primarily office buildings in Perth, but also in NSW and Queensland. In February this year the company announced that its NTA was $1.19 per share, however the current share price is only $0.62. This means GDI shares are trading at a 48 per cent discount to NTA.

In other words, if the company was wound up and all of the property assets were sold, each shareholder would expect to receive close to $1.19 per share, which is much higher than the current share price of $0.62. The REIT sector is littered with companies in a similar predicament where their scrap value is actually higher than the current share price.

With the likely imposition of some level of new tariffs and the knock-on effect of lower interest rates, property trusts would be the beneficiary of this for two reasons.

Firstly, most REITs are leveraged up 30 to 40 per cent, and lower interest rates mean lower ­financing costs.

Secondly, as interest rates fall, investors who were previously enjoying strong cash and bond returns may start to move back towards REITs and their stable income distributions.

Private credit markets face a similar predicament as investors sell down investments below their liquidation value. KKR Credit Income Fund trades at $2.14; however, a recent update to the market shows that its NTA is currently $2.41 per share. This 11 per cent discount to NTA is not uncommon with credit funds, and Metrics ­Credit Partners, which manages $23bn in fixed income, private ­credit and capital markets is in a similar position with one of its flagship funds.

Andrew Lockhart, managing partner at Metrics Credit Partners, says: “While Metrics Income Opportunities Trust (ASX: MOT) is off 15 per cent from its net assets value while Metrics Master Income Fund (ASX: MXT) is 3 per cent off its net assets value. Investors need to remember that debt investments are a lower-risk part of the capital structure compared to equity; lenders such Metrics put a whole lot of loan covenants in place to protect loan positions.

“As such, investors are currently getting exposure to a lower risk part of the capital structure at a discount in investments that are liquid and well diversified. Counterparty risk is low and the upside potential is pretty attractive.”

Separately, it may also be worth looking at selected beaten-down stocks, Canham at Balmoral – which has more than $1bn under management in small and microcap investments – says there are several smaller companies that are looking very attractive in the current choppy market:

“Cedar Woods (ASX: CWP) is a domestic residential developer with key land estates in WA and Queensland,” he said. “The stock is trading at a 15-20 per cent discount to NTA with significant land assets held at cost on the balance sheet. You can’t import or export land, so tariffs are not a big issue. Its share price has drifted down, and it trades on an 8-9 times price-to-earnings ratio, has a 10 per cent earnings-per-share growth and provides a 5 per cent dividend yield – as such it looks good.”

Another stock Canham favours is Victorian gas producer Amplitude Energy (ASX: AEL) which has fallen almost 25 per cent in the past three weeks.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au