More RBC March 18, 2022
Canadian REITs and REOCs – Q4/21 recap
Results modestly ahead; sector holding its own amid macro instability
Our view: 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. While we remain cognizant of potential volatility and downside risks from the pandemic, rising rates, and geopolitical instability, the sector has navigated well to date. Supported by a healthy growth profile, reasonable valuations, and a still robust appetite for real assets, our sector outlook remains constructive.
Q4 results modestly ahead on solid growth from multi-family and industrial. Q4/21 FFOPU increased 4% YoY for our coverage universe, ahead of our 3% estimate, but moderating from the 5% growth in Q3/21. The better-than-forecast Q4 print was aided by strong advances from the multi-family and industrial REITs. Among reporting entities in our universe, 68% (21 of 31) registered earnings that were in line with our forecasts, consistent with the long-term average (65%). In contrast, 22% (7 of 31) exceeded our expectations, while 10% (3 of 31) were short. Acknowledging that sample sets are limited in subsectors, multi-residential had the highest proportion of entities that exceeded our forecasts, while seniors housing had the largest proportion that were short for the third straight quarter (Exhibit 2).
Fundamentals recovering well across most subsectors, with multi-family ahead of the pack. Same- property NOI rose 3% YoY in Q4/21, decelerating from the 4% advance last quarter, but still above the sector’s long-term average (2%). Growth was aided by lower pandemic related costs, higher rents, occupancy improvements, and in some cases, fading incentives. Organic growth was positive across all but two property types. Multi-residential REITs led the way (SP NOI +6% YoY), followed by industrial (+5%), retail (+3%), and diversified (flat), whereas office and seniors housing lagged (-1% each). Notably, growth from multi-res materially accelerated, marking three consecutive quarters of improving traction.
2022 earnings outlook trimmed, albeit with some moving parts (literally). Post Q4 results, our 2022E FFOPU growth decreased to 5% (from 8%), with our 2023E growth rising to 6% (from 5%). The bulk of 2022 reduction was due to some rather sizeable portfolio realignments (e.g., HR’s spinoff of Primaris, EXE’s sale of its retirement portfolio) and a delayed recovery in select seniors housing names (e.g., CSH). Still, our forecasts for the next two years reflect growth that exceeds the sector’s 3% long-term average. As well, estimates for most of our universe reflect FFOPU recovering to 2019 levels in 2022 (Exhibit 5).
NAVs continue to grind higher. Our post-Q4 NAVPU estimates increased an average 3% QoQ, with the largest gains in industrial (+5%), multi-family (+5%), and retail (+3%). Positive revisions were mostly attributable to higher forecast NOI and/or lower cap rates, particularly as upward pricing pressure persists for property types where fundamentals are recovering or where organic growth remains robust. Notably, our NAVPU estimates are, on average, 14% above pre-COVID levels (Exhibit 6), albeit with diversified lagging. Looking ahead, our one-year forward NAVs reflect 6% growth.
Sector has held its ground amid rising rates; valuation still reasonable on most metrics. The TSX REIT index has delivered a 2% YTD total return, slightly trailing the TSX Composite (+3%). Supported by improving fundamentals, most property subsectors are up YTD (Exhibit 10). Conversely, industrial has lagged, which we see as an opportunity to add exposure. In the face of a steep rise in bond yields (but flattening yield curve), sector valuation still screens reasonable across most of our preferred gauges. On P/NAV, the current 3% discount remains below the 1% historical premium (Exhibit 12). The 4.7% AFFO yield (21x NTM AFFO) reflects a 257 bps premium over the 10Y GoC of 2.2%. The spread is tighter than average (367 bps), but still within "fair" value range. That said, relative to corporate bonds (Moody’s BAA Index), the AFFO yield spread (24 bps) has compressed to well below historical levels (100 bps).