Canadian Real Estate Q1 2021 Earnings Preview
Third Wave and Lockdowns Cloud Near-Term Visibility Sector Contains Ample Upside to the Post-Pandemic Recovery
Q1/21 reporting commences this week and runs through May 14 (Exhibit 1 & 2). We expect an overall 4% y/y decline in AFFO/unit for the sector during this final quarter with a pre-pandemic y/y comparison. By sector, Industrial REITs are the only group with meaningful expected AFFO/unit growth (+14%), while we expect flat performance from Apartments, mid single-digit declines for Retail and Office, and double-digit declines for Diversified and Seniors names.
On fundamentals, while we believe leasing momentum likely continued to improve in Q1, attention will also be focused on the impact to-date from the latest lockdowns and third wave of COVID-19. We remain confident in the "re-opening bias" to most of our recommendations, and are encouraged by Canada's vaccination ramp-up (among the fastest growth rate since early March).
Sector-Specific Themes:
Industrial: Leasing market statistics show strong momentum continuing, and Industrial was the stand-out sector in CBRE's Q1 Canadian cap rate survey (~10bps average q/q decline). This should support our strong relative forecast growth, and likely further IFRS fair value gains.
Apartments: We expect H1/21 SPNOI growth and earnings to be relatively flat with fundamentals materially improving in the back half of the year as in-person post- secondary classes resume, immigration levels increase, and many younger workers return to urban centers.
Office: While uncertainty continues to persist around the future of office market demand, our Q1/21 focus will be on space decisions actually being made by tenants, overall leasing velocity, and what management teams are hearing with regard to returning to the office.
Retail: The impacts of aforementioned lockdowns/third wave should be muted by the extension of rent and wage subsidies (through at least September 25 and potentially November, but tapering off starting July) in the recent federal budget. Our medium- term outlook remains unchanged, although bad-debt expense could linger into the summer/fall. Despite strong relative YTD unit price performance by many larger- cap retail-focused REITs, their valuations (including relative to U.S. peers) offer further upside as the economic re-opening progresses, in our view.
Seniors: Near-term results are likely to be impacted by the timing of government funding (i.e. Q1/21 benefitting from Q4/20 funding), and therefore difficult to forecast. With vaccines successfully rolled out across LTC/retirement homes, we expect the current level of elevated costs to gradually decrease and retirement occupancy to begin to increase in H2/21.
Outlook/Valuation
Our recommendations generally look past the near-term impacts of COVID-19. We reiterate our 2021 preferred investing themes of Industrial, Apartments, and discounted Retail. Our two ACTION LIST BUYs are CAR.un and FCR.un, and our full coverage universe is shown in Exhibit 3. The REITs/REOCs within our coverage universe currently trade at a 7% NAV discount compared to a modest NAV discount historically..