CIBC Top PicksEQUITY RESEARCH
January 10, 2022 Industry Update
2022 Real Estate Outlook
Looking Back So We Can Look Forward
Our Conclusion
History rhymes (so it’s been said). As we enter 2022 against the backdrop of a COVID-19 variant that is spreading relentlessly, with arguably little
assurance from governments on when infections are likely to peak, it feels
very much like we’ve been here before. While this scenario may remind
many of us of the beginning of the pandemic in 2020, we would suggest that the outlook for the real estate sector this year more closely resembles that of “pre-pandemic” 2019; valuations overall are nearing pre-COVID-19 levels, concerns about rising interest rates and inflation have worked their way back into daily conversations, and the potential impact of government tapering has re-emerged. While we are certainly not “out of the woods” quite yet, we believe that it is important to remind investors of two key differences between the current situation and the beginning of the pandemic: 1) the majority of the population is now vaccinated, and this will likely be a consideration in whether or not harsher lockdown measures are once again implemented (and the severity of such measures); and, 2) we now have real-world data on how REITs across different asset classes are likely to perform against a worsening pandemic situation – to be clear, the impact has been only modest across most REITs within our coverage universe. Putting the above together, we expect a year that is characterized by heightened volatility, but overall positive total returns across most of the sector.
Key Points
Total Return Outlook For 2022: Given the strong rebound in performance last year, we see a path to more moderate, but still very healthy, ~10% returns within the sector (call it a 5%-15% range) in 2022. Underlying this range are expectations for: 1) moderate FFO growth for the foreseeable future. For context, we estimate ~4% Y/Y growth into the (hopefully) post-pandemic year of 2023; 2) flat to modestly higher valuation levels. For context, the REIT sector currently trades slightly below the five-year pre-pandemic average on a NAV basis; and, 3) a mid-single-digit distribution yield (the sector currently offers a 5% yield).
Top Picks: Within the “safety trade,” our top picks include GRT, KMP, MI,
BSR, TCN, and ERE. Within the “recovery trade,” our top picks include AP,
FCR, and SRU and we continue to view BAM.A as a core holding. We note that if the sentiment towards a pandemic recovery begins to sour, the “safety trade” may carry lower valuation risk (despite these REITs generally trading at higher valuation levels overall).
An Active Approach Should Fare Better: With a myriad of macro factors
set to unfold (the path of interest rates, inflation, unwinding of government
bond purchases) and with COVID-19-related headline news (read risk)
almost a certainty, we foresee significant swings in the market’s sentiment
towards equities, and real estate is unlikely to be an exception. As such, a
more tactical approach to trading around core positions as volatility
increases and declines may be the most compelling path towards alpha
generation