Scotia analyst Mario Saric published his top picks in the REIT sector after a CBRE Group Inc. report on capitalization or ‘cap’ rates [capitalization rate is net operating income divided by the property value],
“CBRE Q4/21 cap rate survey released on Wednesday showed private cap rate compression accelerated a bit, falling 8 bps q/q to 6.02%, the largest drop in 4 years… podium finishes belonged to Industrial (down 26bp vs. 17bp in Q3), a Silver-lining emerged for Seniors Housing (-16bp vs. +1bp), while Apartments finished third (down 10bp vs. 2bp). Retail is showing some promise, with the 5bp of compression (Q3 = 3bp) including 15bp in non-anchored strip; Office is flat. Similar to Q3, falling cap rate markets (45% of total markets surveyed; highest since 2012) far outstripped rising cap rate markets (5%). Montreal and Edmonton were bigger markets with more cap rate compression. We estimate REITs that could be bigger beneficiaries include SMU [Summit Industrial Income REIT] , DIR [Dream Industrial REIT] , GRT [Granite REIT], CSH [Chartwell Retirement Residences], SIA [Sienna Senior Living Inc.] and IIP [Interrent REIT] . Interestingly, SMU, DIR, and IIP have seen sizable implied cap rate expansion since the Q3 update. Bottom-line, with the sector trading at a mid-single-digit discount to NAV, falling cap rates are positive for unit prices in our view. Our Top Growth Picks = BAM, GRT, HOM, IIP, SMU, SVI, TCN; Top Value = AP, BAM, CSH, DIR, ERE, REI; Top Income = APR, CRT, NWH "