RBC Capital Markets analyst Pammi Bir outlines a cautious outlook for REITs while noting his top picks in the sector,
“Our Outperform ratings include Allied Properties, Boardwalk, BSR, CAPREIT, Dream Industrial, European Residential, First Capital, Granite, InterRent, Killam Apartment, Minto Apartment, Morguard Residential, RioCan, SmartCentres, and Chartwell Retirement Residences … Fundamental traction continues to improve across most subsectors – multi-family and industrial still out front. Same-property NOI [net operating income] rose 2% year-over-year in Q1/22, decelerating from the 3% advance last quarter, and in-line with the sector’s long-term average (2%). .. By subsector, multi-family REITs led the way (SP NOI +6% YoY), followed by industrial (+5%), diversified (+3%), and retail (+2%), where as office (flat) and seniors housing lagged (-24%)… Pullback offers a larger margin of safety. The TSX REIT index has posted a -10% YTD total return, trailing the TSX Composite (-3%). Most subsectors are down YTD, with industrial (-16%) and multi-family (-10%) facing the heaviest pressure. We believe the material rise in bond yields and uncertainty surrounding tax policy and regulatory risks have weighed on sector returns, along with other macro factors. The pullback has driven sector valuation to a 15% discount to NAV (well below historical NAV parity), 6% implied cap rate (324 bps spread to 10Y GoC), and 5.4% AFFO [adjusted funds from operations] yield (19x NTM AFFO, 261 bps spread to 10Y GoC; 21 bps spread to Moody’s Baa Index; Exhibits 9-12). On balance, we see a reasonable margin of safety, supported by improving fundamentals, decent growth profiles, and a strong private market appetite for real assets”