Ingenia Communities Group (ASX: INA) rallied almost 3% today on the back of full-year results that exceeded previous guidance. The REIT recorded EBIT of $61.5m, up 26% on FY18, along with 21% revenue growth. This was substantially better than comparable REITs such as Villa World (ASX: VLW), which saw revenue and profit falls. Commercial REIT’s such as Dexus (ASX: DXS) also saw large profit declines on the back of adverse revaluation changes, highlighting that the challenging industry fundamentals in real estate are not just confined to one segment of the REIT market.
Ingenia Lifestyle Communities (Credit: Ingenia)
Unlike most other REITs on the ASX, Ingenia focusses on lifestyle and holiday properties. The bulk of the properties are in NSW and Queensland, with a small share in Victoria. The company’s concentration on capital city and coastal markets increases the quality of the REIT but does expose it to increased recession risk. In a downturn, coastal markets have previously sold off heavily as people cut back on holiday expenditure, exposing the REIT to unrecoverable rent as they struggle to source new tenants, under a worst-case scenario. Most of these assets are priced on capitalization rates of over 6%, as compared with 4.63% for Governor Phillip Tower, a more stable, premium asset with blue-chip tenants like Goldman Sachs. While there are additional risks that emerge when an investor migrates away from A grade assets, the additional yield is a worthwhile argument in favour of investing in slightly riskier assets.
The business also has a development division which posted a strong margin. Unlike most development businesses, Ingenia focusses on lifestyle communities and targets retirees, which reduces their earnings cyclicality. This is because most retirees have a large share of their money invested in conservative investments by default leading into retirement, which means that their buying power is not heavily affected by changes in the economic cycle. Additionally, Ingenia concentrates on building master-planned communities outside of cities where retirements are cheaper, further reducing the cyclicality of that part of the business.
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