RBC update on REIT's and top picks From the Globe & Mail this morning:
RBC Capital Markets analyst Pammi Bir discussed the difficult market for REITs and provided top picks.
“The TSX REIT Index has posted a -19% total return (to Jun-23/22), on pace for among its weakest first-half returns on record … We believe the combination of the sharp rise in interest rates (particularly at the long-end of the yield curve) and growing concerns of a potential material economic slowdown has weighed heavily on sector sentiment … A reasonable but not excessive “margin of safety.” The sector is trading at 23% below net asset value, well below its LTA [ long term average], with investors likely discounting higher cap rates and/or lower NOI [net operating income] ahead. Notably, the sector’s 6.3% implied cap rate is 80 bps above our 5.5% avg. NAV cap rate. The current 17x P/AFFO [price to adjusted funds from operations] (6.0% AFFO yield) is in line with the 10 year avg. The 268 bps AFFO yield spread to the 10Y GoC has returned to fair value range, as has the 62 bps spread to Moody’s Baa Index. We have 16 outperforms: Allied Properties, Boardwalk, BSR, CAPREIT, Chartwell Retirement Residences, Dream Industrial, European Residential, First Capital, Granite, InterRent, Killam Apartment, Minto Apartment, Morguard North American Residential, RioCan, SmartCentres, and StorageVault. Amid higher interest rates, our picks remain skewed to names we view as more resilient in delivering NOI, FFO, NAV, and distribution growth, particularly in industrial & multi-family.”