INDUSTRY OVERVIEW
Q1/24 PREVIEW: AFFO GROWTH EXPECTED TO CONTINUE ACCELERATING
THE TD COWEN INSIGHT
We expect accelerating AFFO/unit growth in four out of six sub-sectors, leading to +6.4% overall growth in Q1/24, driven by strong operating performance and NOI growth across most asset classes, with continually moderating interest expense headwinds. We forecast +9% y/y growth in per-unit interest expense, down from +15% in Q4/23 and +22% in Q3/23.
We expect Seniors to lead with AFFO/unit growth peaking +44% y/y, followed by Residential at +13%, and both Industrial and Retail at +2%. Note that our Q1/24 forecast for Industrial is an anomaly due to interest expense timing for GRT/DIR (+8% growth expected for the year). Figures 1, 7, and 8 provide our estimates, consensus, and conference call details.
Key Themes. While fundamentals across most sectors remain very strong, we could see modest downward pressure on consensus estimates, owing to the higher interest rate environment to start the year (as well as moderated timing expectations for interest rate cuts). That said, with recent acquisition activity (e.g., Blackstone's privatization of Tricon in January and Apartment Income REIT earlier in April) and asset sales appearing to pick up, we see this as a potential catalyst for the sector, especially as we approach the start of a rate cut cycle.
Valuation (Figures 3-5). Year-to-date, the CAD REIT index is -7.0%, largely due higher long- term interest rates, in our view, and is tracking below our initial 0%-35% total return range expected for 2024. At 77% P/NAV, our coverage has been range-bound to start the year, and remains well below the 94% post-GFC average. The FFO yield spread to the 10-year GoC bond yield is +10bps YTD (Figure 4) and remains undervalued at 5.9% versus the 4.9% adjusted long-term average. With the inverted yield curve, today's 5.4% spread to the two- year GoC appears expensive when compared to the 5.8% adjusted historical average.
Our three preferred sectors are Industrial and Retail, followed by Residential. Our top picks are CAPREIT, Dream Industrial REIT, and Granite REIT.