Brookfield Asset Management Voting Ord Shs Class A BXDIF

RBC

[retiredcf]

October 6, 2020

Real Estate Investment Trusts

Quarterly Review and Sector Outlook – Q4 2020

Recommendations

Of our universe of 37 TSX-listed REITs, 12 are rated Outperform: Allied Properties REIT, Artis REIT, Boardwalk REIT, BSR REIT, Dream Industrial REIT, European Resi REIT, First Capital REIT, Granite REIT, Killam Apartment REIT, Minto Apartment REIT, SmartCentres REIT, and WPT Industrial REIT. Also rated Outperform and included herein are Brookfield Asset Management, Brookfield Property Partners LP, Chartwell RR, Colliers Int’l Group, and Tricon Residential.

Highlights

•  Q3 REIT returns: General stability, but no better, and underperformance versus broader equities – The REIT Index posted a Q3/20 total return of -1% (-3% price + 2 points of yield), bringing 9M/20 performance to -22% (-25% price + 3 points of yield). Canadian REIT returns modestly trailed the Global (+2%), European (+2%), US (+1%), and Asian (+1%) peers. The REIT Index also lagged the TSX Index (+5%), 7 GICs sectors, and the nil-% total return from 10Y GOCs.

•  Equity tone better (but mostly sector-specific); real estate debt markets continue to provide strong support – TSX-listed REITs ended Q3/20 with $71B of market cap, -$1B QoQ and -$20B (-22%) YTD. Q3/20 equity issuance of $1.1B (8 deals) was principally (65%) in two property sectors (multi-res and industrial). Real estate debt market tone began to improve in late Q2 and carried momentum through Q3, with 5Y mortgage spreads tightening by 27 bps to 179 bps (equal to LTA). Q3 unsecured debt origination was a solid $1.8B. Overall, the sector is tracking towards our 2020 equity origination forecast of $3.0–3.5B. Yet, for the second time this year, we have raised our unsecured debt issuance forecast, to $7.5–8.5B (from $7.0–8.0B).

•  Diving deep into retail and multi-res, via two feature sections herein – Noting the next 6-plus months look particularly difficult, we believe savings accumulation and society’s tremendous pent-up desire to get out-and-about render certain retail REITs as “return to greater normalcy” trades. In multi-res, we believe higher unemployment, stalled immigration, and ON’s 2021 rent freeze could drive 4 to 6 Q’s of softer yet still resilient results. Regardless, now at a discount to NAV, we believe multi-res offers a particularly attractive risk/reward equation.

•  Valuation metrics read quite favourably (reflecting greater than usual uncertainty) – Our sector P/NAV discount was 17% at Q3, unchanged QoQ and -15 pp from Q4/19 but well off Q1’s all-time low of 30%. The sector’s 16.6x AFFO multiple was -0.6x in Q3 (AFFO yield of 6.0%, +21bps). With little change in Canada yields, the sector’s AFFO premium over 10Y GOC yields widened to 548 bps (+18 bps), and with a sizable rally in corporate credit, the AFFO yield premium over the Moody’s BAA Index yield widened to 261 bps (+36bps). Both yield spreads put REIT valuations in “statistically cheap” territory.

•  Reasons for optimism, with a dash of (Q4) caution – In the very near term (next 80–90 days), we note that listed property stocks may be one of 2020’s prime sector targets for year-end “tax-loss selling”. Beyond this, we are optimistic. We see solid corporate liquidity across thesector, supportive debt markets, and attractive valuation readings. We are also bullish on neighbourhoods and the long-term growth prospects for Canada’s major cities.