REAL ESTATE Q1/24 REVIEW
THE TD COWEN INSIGHT
Q1/24 saw faster growth in the Seniors Housing sector's recovery, higher interest expense vs. our forecast plus some timing/transitory occupancy issues at a small handful of names. Our AFFO growth outlook is largely intact and fundamentals across most sectors remain robust. That said, investor sentiment remains tethered to interest rates, and that thus-far elusive first cut should be a catalyst.
Q1/24 results: Overall AFFO/unit growth of 7.1% y/y (highest since Q2/21) exceeded our 6.4% forecast, as an off-the-charts 30%-plus beat (and 60%-plus growth) by the Seniors Housing sector was partially offset by slight misses in the Retail and Industrial sectors. AFFO/unit growth ex-Seniors was a relatively modest 3% (13% for Residential offset by flat elsewhere, with the Industrial REITs facing unusually high interest cost increases specific to this quarter, as expected). Despite overall higher-than-expected per-unit interest expense growth for the second consecutive quarter (11% y/y vs. our 9% expectation), this headwind continued to dissipate vs. growth rates of 19% in Q4/23, 22% in Q3/23, and 33% in Q2/23. There were a handful of NOI misses in Q1/24, although mostly due to timing/transitory reasons (Retail and Storage sectors).
Reported SPNOI growth averaged 5.7%, with Residential and Seniors improving (vs. FY2023) to 9.5% and 19%, respectively, and most other sectors decelerating (including Industrial to 5.4%). Overall ex-Seniors SPNOI growth was 4.6%.
Outlooks and sentiments expressed by management teams overall remained positive and increasingly so in some cases — specifically in the Residential, Retail, and Seniors sectors. Industrial remains strong, but is seeing lease completion times lengthen further. Although the first interest rate cut seems to be more and more imminent, our sense is that some management teams are increasingly preparing for a “higher-for-longer” interest-rate environment (e.g., greater preference for paying down debt).
For the rest of 2024, we expect the Seniors Housing sector to continue leading overall AFFO growth, while the Residential and Industrial sectors deliver nearly identical AFFO growth rates of about 8%. We forecast Retail REITs' average AFFO growth to slowly build towards 3% by Q4/24.
Our top picks are CAR.un, CSH.un, GRT.un, DIR.un and FCR.un.
Overall, we have reduced most sectors’ 2024 AFFO/unit estimates by 1-2% (mainly due to higher interest expense), except Seniors, which has been raised 8%. Through 2025, we forecast two-year AFFO/unit CAGRs of 6.4% overall and 5.1% ex-Seniors. Besides strong fundamentals throughout the majority of our coverage universe, other key drivers behind our forecasts are 5% average SPNOI growth and 0.7x lower Debt/EBITDA by Q4/25.
Our target prices are also largely unchanged, but they reflect the 3% reduction we made in our Q1/24 preview (-5% since late March). The CAD REIT index is -3.7% YTD (+2% during the earning season) and below our initially expected outside range for 2024. Valuations were steady vs. pre-Q1/24 earnings, with the sector P/NAV at 78% and the FFO yield spread to the GoC 10-year bond yield at 5.8% (vs. adjusted long-term average of 4.9%).