Raymond James analyst recommends CAR.UN(from The Globe and Mail)
Though the COVID-19 pandemic has temporarily “hit the pause bottom” on positive Canadian property fundamentals, Raymond James analyst Brad Sturges sees an attractive investment opportunity emerging.
In a research report released before the bell on Tuesday, the firm resumed coverage of nine equities, emphasizing a growing disparity between unit prices and underlying real estate values over the last six months
“Canadian REIT/REOCs are now trading at a 15-per-cent average discount to estimated NAVs [net asset values],” he said. "While the public valuation pullback reflects greater near-term operating and political risks, recent history suggests to us that these pricing dislocations to the direct property market can provide fairly good longer-term buy signals.
“At the start of 2020, certain property sectors across Canada (ex. Alberta) such as industrial, office and multifamily, generally exhibited low average vacancy rates and rising rents per square foot. The strongest property fundamentals heading into the pandemic were found in urban centres such as Toronto, Montreal, and Vancouver. Although some recent COVID related softening in leasing traffic has occurred within certain regions or commercial and residential sectors, Canadian property fundamentals remain generally more in favour of landlords given the lack of available supply.”
Mr. Sturges said the nine REIT/REOCs have shown the defensive nature of their portfolios through high rent collection rates, limited deferrals and have generated positive organic growth year-over-year.
“While near-term operating headwinds can persist, we believe the dislocation between public unit prices and underlying estimated NAVs may once again prove to be a very attractive buying opportunity,” he said. "Key potential near term positive catalysts to keep in mind for the Canadian REIT sector include: positive vaccine developments; improving rent collection and deferral repayment trends; increasing transactional activity in the direct property market that validates estimated NAVs; cap rate compression in certain property sectors; and greater clarity surrounding regulatory risks.
“Our preferred Canadian REIT/REOCs are well positioned to weather the storm and generally feature strong balance sheets (e.g. low financial leverage, ample liquidity), below-average AFFO payout ratios, attractive portfolio concentration of urban properties, generate positive organic growth year-over-year, trade at relative P/NAV discount valuations, and may benefit from near-term positive catalysts. Our top picks currently include CAR.UN.
* Canadian Apartment Properties REIT (CAR-UN-T +0.71%increase) with an “outperform” rating and $55.50 target. Average: $56.24.
“Although the Ontario Government’s expected plan to freeze rents for existing tenants in 2021, we believe that CAPREIT is positioned to capture higher AMRs [average monthly rents] realized upon suite turnover, and to execute on Canadian multifamily sector consolidation prospects due to its financial position,” he said. “CAPREIT’s affordable rental portfolio segment may experience resilient leasing demand fundamentals during the pandemic, supporting its future organic growth profile.”
From <https://www.theglobeandmail.com/investing/markets/inside-the-market/article-tuesdays-analyst-upgrades-and-downgrades-128/>