IA Capital A lack of supply and recovering immigration levels are likely to “intensify” housing and rental price growth, according to iA Capital Markets analyst Johann Rodrigues upon resuming coverage of the Canadian Multi-Family Real Estate sector.
“The principal phenomenon driving soaring home prices and rising rent growth is the Great White North’s dire lack of supply,” he said in a research report released Monday. “There are only 424 housing units for every 1,000 people, the lowest among G7 countries, with 1.9 million homes needed just to meet the average. Except for Montreal, the number is lower across all large population centres (more than 1 million), with Toronto (386) the most pronounced. Canada’s population is simply growing faster than it can build. Despite COVID, Canada’s population still grew 5.2 per cent (1.8 million to 38 million) over the last five years, almost double the pace of the other G7 countries. Roughly 75% of growth comes via immigration. Immigration numbers, including the all-important foreign student, have bounced back and are headed for new all-time highs, with 432K new permanent residents set to be admitted this year as the government works through the 1.8 million immigration backlog. We believe that the rising population weighed against a growing housing deficit is driving a golden decade (on either side of the pandemic) for multi-family stocks that we’re not yet halfway through.”
The analyst emphasized “it is a myth that investors cannot make money in real estate stocks when rates are rising,” adding: “The trick is to migrate into shorter duration real estate. In the last 20 years, there have been six distinct periods of sustained rising rates (200+ days) and while the TSX Capped REIT Index lagged the broader market (12 per cent vs. 30 per cent on average), short duration real estate (less-than 4-year WALTs) almost tripled the performance of long duration peers (more than 8-year WALTs) and Multi-Family (31 per cent) was the top performing asset class, and the only one to outperform the TSX.”
Mr. Rodrigues also thinks “political theatre” has weighed on equities exposed to the sector recently, however he sees investing opportunities emerging.
“With the upcoming Ontario election and Trudeau’s promise to tackle the ‘financialization of the housing market’ front and centre after the Liberal and NDP agreement, Ontario apartment names have sunk 5 per cent to begin the year (vs. flat Capped REIT Index) ... but the long and short of it is that we believe ‘selling the rumour’ has gone too far and the names will likely bounce as we make our way towards June,” he said.
He resumed the firm’s coverage of seven equities with “buy” recommendations on Monday:
* Boardwalk Real Estate Investment Trust with a $65 target. The average on the Street is $62.68.
“2021 was a helluva ride for the stock, as Boardwalk was the best performing multi-family REIT and the fifth-best performing real estate company overall, posting a 66-per-cent total return (vs. 35 per cent for the TSX Capped REIT Index). We believe that momentum will continue this year, especially as Boardwalk works to surpass its pre-oil crash peak. There’s still good upside in this name,” he said.
* BSR Real Estate Investment Trust with a US$25 target. Average: US$23.33.
“As a result of the dramatic shift in asset and growth profile, historical valuations are less relevant. However, based on management’s guidance, BSR is poised to put up SPNOI, FFO, and NAV growth that will likely lead both the Canadian and US multi-family sectors while still trading at a relative discount,” he said.
* Canadian Apartment Properties Real Estate Investment Trust with a $65 target. Average: $67.53.
“Despite strong underlying fundamentals and growth forecasts, CAPREIT is trading at a rare discount to historical levels on both a NAV and AFFO multiple basis. The blue-chip, which has historically traded at a 3-per-cent NAV premium, currently sits at a negative 10-per-cent discount to our NAV. Meanwhile, while the REIT is trading in line with its five-year AFFO multiple average (24.4 times), it’s at a negative 0.5-times multiple discount to the multi-family peer group when it has historically traded at a 0.5x premium. When an opportunity to pick up this REIT bellwether at a discount presents itself, we believe investors should act before it returns to its warranted premium,” he said.
* European Residential Real Estate Investment Trust with a $5.50 target. Average: $5.73.
“ERES not only trades at the largest NAV discount (13 per cent) of any TSX-listed multi-family REITs (negative 6-per-cent average), it’s also the most attractive from an AFFO multiple basis (19.7 times 2023 AFFO vs. 23.7-times average),” he said. “Considering the REIT should put up better-than-average FFO growth (10 per cent vs. 8 per cent) and NAV growth (8 per cent/6 per cent), we think ERES makes for one of the most compelling risk/reward plays in the space.”
* InterRent Real Estate Investment Trust with a $20 target. Average: $19.71.
“InterRent’s impressive outperformance is not simply a historical story, the REIT is poised to put up growth going that also leads the Canadian-based multi-family group going forward. Over the next two years, InterRent should generate an average of 5-per-cent SPNOI growth, 13-per-cent FFO per unit growth, and 8-per-cent NAV per unit growth, all almost double the peer average. Given that, the stock should outperform, and a stock that outperforms its multi-family peers (when we think the asset class should outperform broader REITs) is a must-own name to us,” he said.
* Killam Apartment Real Estate Investment Trust with a $25 target. Average: $25.94.
“Atlantic Canada is as hot as anywhere in Canada right now, with stellar economic and population growth,” he said. “Killam has done an excellent job steering through the pandemic without sacrificing NOI and asset value. With fears surrounding the Ontario election weighing on peers, it could end up being the best performer in 2022 and we suggest being along for the ride.”
* Minto Apartment Real Estate Investment Trust with a $26 target. Average: $27.36.
“Investors have a rare chance to pick up Canada’s highest-quality apartment portfolio at a rare discount. We wouldn’t suggest missing out,” he said.
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IA Capital Markets analyst Gaurav Mathur thinks the industrial and logistics sector is “moving into a higher gear than ever witnessed,” leading rental rates to continue to “march upwards,” supply pipelines to tighten and the continued compression of cap rates.
In a research report released Monday, he initiated coverage of the Canadian Industrial Commercial Real Estate (CRE) sector, emphasizing its demand drivers are becoming “stronger” than other asset classes.
“With rent growth exceeding expectations in many markets globally, amid tightening supply, investors in the direct CRE sector have rewarded the sector with steady cap rate compressions,” said Mr. Mathur. “Based on our analysis, we believe that the Canadian industrial REITs in our coverage have a larger growth runway than previously understood by the Street. Of note, the focus on markets with an asymmetric risk-reward ratio among management teams has now begun to permeate into individual growth strategies.
“We believe that the process of price discovery continues to occur for the Canadian industrial REITs in our coverage. In our view, segments of the CRE market that have witnessed acquisition activity support our belief that private real estate values have been more than stable and are moving higher in many instances. While the primary Canadian industrial markets such as Toronto and Vancouver will continue to strengthen, markets such as Montreal, South Western Ontario (SWO), and Calgary are expected to illuminate the growth path ahead. Adding select industrial markets in the US and Europe to this mix, which when combined, result in new runways for growth for the Canadian industrial REITs in our coverage.”
The analyst sees the “tightness” of demand in major Canadian markets as a persistent theme, calling industrial assets a “relative winners of the global demand shocks created by the COVID-19 pandemic.” He also thinks other sources of supply in secondary and tertiary markets are “mostly spoken for.”
Concurrent with his report, Mr. Mathur resumed the firm’s coverage of a pair of equities:
* Calling it “an underrated asymmetric risk-reward story,” he gave Dream Industrial Real Estate Investment Trust ia “strong buy” recommendation and $19.50 target, narrowly below the $19.69 average on the Street.
“Overall, we view DIR.UN as an undervalued industrial total return growth story for REIT investors focused on gaining exposure to the opaque European and Canadian industrial CRE sector,” he said. “DIR.UN offers investors an attractive mix of (1) growing industrial assets in Europe and Canada with significant mark-to-market rent appreciation potential, (2) focused capital deployment on acquisitions and developments across Europe and Canada, (3) attractive cost of capital based on swapping higher Canadian interest rate debt with lower cost Euro debt, and (4) an attractive dividend profile (4.4-per-cent yield).”
* Referring to Nexus Industrial Real Estate Investment Trust as “a strong organic total return growth story in the Canadian Industrial sector,” he also gave it a “strong buy” recommendation with a $15.50 target. The average is $14.76.
“The REIT’s graduation to the TSX last year has increased its exposure among new institutional investors, both domestic and foreign, and improved its trading liquidity,” said Mr. Mathur. “Based on our conversations with the buy-side, we note the rise in investor interest globally as investors seek a compelling total return thesis focused on the Canadian Industrial CRE market.”