Canadian Real Estate Q2 2021 Earnings Preview
Visibility on Recovery Improving; Variants Remain a Concern Sector Contains Ample Upside to the Post-Pandemic Recovery
Q2/21 reporting commences July 21 and runs through August 17 (Exhibit 1 & 2). For the sector, we forecast 6% average growth in AFFO/unit for this first period that compares to a year-ago quarter impacted by the pandemic. By sector, we expect a +12% average AFFO/unit increase for Retail, +6% for Industrial, +3% for Apartments, and declines for Seniors (-2%) and Office (-6%).
With restrictions on many in-person activities continuing during most of Q2, we expect results to reflect fundamentals largely consistent with those during Q1 (except for industrial property, where momentum has accelerated). With restrictions across the country now being lifted, our focus will be on management commentary around post-Q2 trends, as well as the outlook for the remainder of the year and into 2022.
Sector-Specific Themes:
Industrial: Q2 market statistics revealed strong momentum in both leasing demand and transaction pricing, with strength now also materializing in secondary markets. With many markets seemingly in or approaching inflection points (i.e. vacancy that cannot go any lower), we see good runway for continued outperformance.
Apartments: We expect Q2/21 occupancies and AMR to be relatively stable versus Q1/21, with fundamentals anticipated to materially improve in the latter half of the year as in-person post-secondary classes resume, immigration levels increase, and many young professionals return to urban centers.
Office: Canada's strong vaccination pace is paving the way for employers to welcome staff back to the office this fall, which we believe will lead to stabilized market vacancies and improved confidence in future office space demand. We expect operating results to begin improving later this year and into 2022.
Retail: In addition to strong y/y AFFO growth for Q2/21, we expect to hear improved near-term outlook commentaries from management teams. Additionally, we expect a resumption in shopping centre asset transaction activity, which could provide favourable data points on valuation. The recent/ongoing easing of restrictions bodes well for an ultimate return to 99%+ rent collections, although the Delta variant continues to present some uncertainty.
Seniors: Q2/21 results are likely to be impacted by the timing of government funding as well as restrictions around move-ins in retirement homes. With vaccines successfully rolled out across LTC/retirement homes, we expect pandemic-related costs to continue to gradually decrease and retirement occupancy to begin to increase in H2/21 (link).
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 (link). Our two ACTION LIST BUYs are CAR.un and FCR.un, and our full coverage universe is shown in Exhibit 3. REITs/REOCs within our coverage universe currently trade at NAV compared to a modest NAV discount historically