IA Capital Markets analyst Gaurav Mathur recommends investors “become more active” in the Canadian REIT sector in 2023, expecting “multiple opportunities to materialize and create significant value in an increasingly volatile year ahead.”
2“We expect the correction in the Canadian real estate sector, which began in mid-2022, to continue in 2023 as the sector and broader economy absorb the effects of higher interest rates, higher cost of capital, softening fundamentals, and capital constraints,” he said. “The volatility ensured that most investors remained on the sidelines as the S&P/TSX Capped REIT Total Return Index printed a 17-per-cent loss in 2022. While the sector has rebounded in the past from material down years, we believe that the challenges ahead are very different from those seen in past rebounds.”
“In our view, this is the start of a period where most investors will begin to focus on the bottom line, both in the sector and the broader market, as the downdraft in risk assets from mid-2022 can potentially turn into a longer route in 2023. While the sector will continue to remain in risk-off mode, we may begin to see a risk-on sentiment at some point in 2023 should rates stabilize and if recession conditions are averted or remain mild. However, for the foreseeable future, we think that the probability of risk-on sentiment remains low. Thus, for the year ahead, we recommend investors rotate into names that offer a healthy mix of capital preservation and growth prospects, i.e., names that produce cash flow growth, maintain conservative balance sheets, have strengthening fundamentals, and are liquid.”
In a research report released Friday titled It’s Time to be Active, Mr. Mathur relaunched coverage of 13 REITs, suggesting investors “rotate into names that offer a healthy mix of capital preservation and growth prospects, i.e., names that produce cash flow growth, maintain conservative balance sheets, have strengthening fundamentals, and are liquid.”
He resumed coverage of these equities:
• Automotive Properties Real Estate Investment Trust with a “hold” rating and $12.50 target. Average: $13.03.
• Boardwalk Real Estate Investment Trust with a “buy” rating and $60 target. Average: $60.36.
• BSR Real Estate Investment Trust with a “strong buy” rating and US$18 target. Average: US$19.19.
“We are upgrading our rating from Buy to Strong Buy for BSR REIT,” he said. “The REIT derives 97 per cent of its NOI from four target markets (Dallas, Houston, Austin, and Oklahoma City), which continue to witness strong population growth, strong employment growth, affordable cost of living, and no rent control in any of its markets. The robust demand has led BSR to post double-digit rent increases on new leases for six consecutive quarters. The REIT also maintains a defensible balance sheet that allows for growth as macro headwinds subside. We forecast 7.9-per-cent AFFO [adjusted funds from operations] per unit growth (2022-2024 CAGR [compound annual growth rate]), which is the highest in the Canadian multifamily REIT peer set.”
• Canadian Apartment Properties Real Estate Investment Trust with a “buy” rating and $56 target. Average: $53.52.
• Choice Properties Real Estate Investment Trust with a “buy” rating and $16 target. Average: $15.47.
• European Residential REIT with a “hold” rating and $3.75 target. Average: $4.35.
" We are downgrading our rating from Buy to Hold for European Residential REIT,” he said. “While the REIT has multiple demand drivers – favourable immigration policy, strong employment, strong housing demand – we note the regulatory overhang from the proposed 2024 mid-market MFR regulations leads us to remain on the sidelines until further clarity ensues.”
• First Capital Real Estate Investment Trust with a “hold” rating and $18 target. Average: $18.69.
“We are downgrading our rating from Buy to Hold for First Capital REIT. The REIT owns a portfolio of urban grocery-anchored assets across Canada that allows for steady operating performance. However, the rise in investor activism has led us to move to the sidelines until a clearer path emerges,” he said.
• InterRent Real Estate Investment Trust with a “strong buy” rating and $16 target. Average: $14.85.
• Killam Apartment REIT with a “hold” rating and $18.50 target. Average: $20.41.
“We are downgrading our rating from Buy to Hold for Killam Apartment REIT. While the REIT has multiple demand drivers – favourable immigration policy, strong housing demand, newer product, and a track record of improving operating metrics – which allows consistent SPNOI [same-property net operating income] growth, from a cash flow lens we forecast 2.8-per-cent AFFO [adjusted funds from operations] per unit growth (2022-2024 CAGR), which is at the lower end of the Canadian multifamily REIT peer set,” he said.
• Minto Apartment Real Estate Investment Trust with a “buy” rating and $18 target. Average: $19.54.
• Slate Office REIT with a “hold” rating and $5 target. Average: $4.72.
• SmartCentres Real Estate Investment Trust with a “hold” rating and $30 target. Average: $30.13.
• True North Commercial REIT with a “hold” rating and $6.25 target. Average: $6.05.
Concurrently, Mr. Mathur said his top long-only pair trade ideas for 2023 “represent a mix of these attributes.”
They are: Nexus Industrial REIT (“strong buy” and $14 target); Granite REIT (“strong buy” and $95); BSR REIT (“strong buy” and US$18); Boardwalk REIT ( “buy” and $60); Primaris REIT
(“buy” and $16) and Choice Properties REIT ( “buy” and $16.50.).
For our more income-oriented investors “focused on longer-term value and defensible property characteristics,” Mr. Mathur recommended these three equities: Slate Grocery REIT ( “buy” and US$14); Allied Properties REIT (“buy” and $36) and Dream Industrial REIT ( “strong buy” and $17)