EQUITY RESEARCH
June 28, 2023 Transferring Coverage
REITs Valuation Update
Down 4% YTD, Asset Class Performance Varies
Our Conclusion
Our coverage declined 4.0% YTD, underperforming the Capped REIT Index,
which declined 2.5%. Returns were broadly negative, with CRR and HR
seeing >10% declines, while GRT and DIR delivered positive double-digit
returns. We continue to favor industrial REITs for earnings growth and strong
fundamentals and in particular highlight DIR for its expanded presence in the
GTA and Montreal. While relative returns are higher for its peers, we
highlight CHP as one of the more defensive names in our coverage.
As of June 28, we are transferring coverage of Choice Properties, Crombie,
CT, Primaris, Plaza Retail, H&R, Melcor, Granite and Dream Industrial REIT
from Dean Wilkinson to Sumayya Syed. We have lowered our NAV and price
target for CRR to $18.00, from $19.00, on slight model adjustments. We
have also modestly lowered our FFO and AFFO for PMZ. We maintain the
rest of our coverage ratings, price targets and estimates.
Key Points
Rates Continue to Weigh On Valuation: Average valuations are at an
approximate two-turn P/FFO discount to two-year historical averages, and a
one-turn discount to their five-year averages. YTD the average NAV discount
for our coverage has widened from ~16% to ~23%, though performance has
varied. Industrial REIT valuation has improved modestly from a 20%
discount to ~17%, whereas the retail and diversified REIT discount has
almost doubled. The average implied cap rate is ~7.5% which is ~115bps
above our estimates. As fundamentals across our coverage remain intact,
higher rates continue to be the biggest headwind.
Defensive Retail Outpaces Diversified: On a P/NAV basis, single-tenant
retail names are trading at a 16% discount vs. 30% for diversified retail. We
view this spread as reasonable in the context of historical valuation. We
highlight CRR as attractive from a valuation perspective, trading at a larger
discount vs. peers CHP and CRT.
Industrial Still Strong After Pandemic Euphoria: GRT and DIR trade at an
average 17% NAV discount, in line with the single-tenant retail REITs. For
both, the average NAV discount is ~15% wider than the historical five-year
average. Although valuation has compressed from the pandemic-era
premium, on a relative basis the group continues to outperform, which we
view as reflective of strong fundamentals.
H&R At A Large Discount: On both an absolute and relative basis, H&R’s
~44% NAV discount stands out despite the portfolio streamlining that has
occurred in the last two years. We believe valuation reflects uncertainty
around the REIT’s repositioning strategy. We note the progress to date has
significantly improved the organic growth profile, which we believe is not
reflected in the valuation.