iA Capital Equity analysts at iA Capital Markets upgraded their “2022 Top Picks” list for the fourth quarter in a research report released Monday before the bell.
“While the performance of our 2022 Top Picks fell into negative territory in the latter half of Q3, I am somewhat happy that we still outperformed the TSX Composite Index by 412 bps since we started tracking in January,” said Neil Linsdell, the firm’s Head of Research. “Recall that in 2021, our Top Picks delivered a return of over 34 per cent, beating the TSX Composite Index at just under 22.”
Real Estate and REITS
Analyst Gaurav Mathur named Nexus Industrial REIT and Primaris REIT as his top picks.
For Nexus, he has a “strong buy” rating and $15.50 target. The average is $13.31.
“Despite the recent pullback in unit prices, the fundamental thesis for Nexus Industrial REIT remains intact,” he said. “The REIT has a long growth runway with rental rate increases of 50-100 per cent across the portfolio, much higher than its publicly listed peer set in the Canadian industrial REIT sector. Based on our channel checks, we expect cap rates to stabilize soon as supply-demand imbalances continue to push pricing, both on a psf and rental rate basis. Management continues to maintain capital allocation discipline by focusing on redevelopment projects, recycling capital, and being opportunistic on the acquisitions front. On an implied cap rate basis, the REIT trades at a 6.2-per-cent cap rate (vs. 4.8 per cent for the industrial REIT sector) and has a healthy spread (up 3.0 per cent) when compared to the Canadian 10-year bond yield currently at 3.2 per cent, indicating a long growth runway. Additionally, the REIT offers a 7.7-per-cent distribution yield.”
For Primaris, Mr. Mathur has a “buy” rating and $15 target. The average is $16.33.
“The REIT continues to benefit from positive momentum in the business through rental rate increases and continued leasing strength,” he said. “Add rising occupancy levels and asset positioning to the mix, and the REIT has a strong growth runway. ... The REIT clearly stands out in the Canadian Retail REIT sector with a low D/GBV of 29 per cent (compared to 42 per cent for its peers) and its use of the NCIB on a leverage neutral basis. We note that management is actively focused on creating shareholder value while stringently adhering to its capital allocation guardrails. On an implied cap rate basis, the REIT trades at an 8.5-per-cent cap rate (vs. 5.8 per cent for the retail REIT sector) and has a healthy spread (5.3 per cent) when compared to the Canadian 10-year bond yield currently at 3.2 per cent, indicating a long growth runway. Additionally, the REIT offers a 6.4-per-cent distribution yield.”
Separately, analyst Johann Rodrigues named InterRent REIT to the list with a “strong buy” rating and $18 target. The average is $16.11.
“As to why we like InterRent best, the stellar management/Board, the leading track record of NAV growth, the geographic mix (90-per-cent GTA/OTT/MTL/VAN), and the density pipeline are all strong reasons to invest in the name,” he said. “However, the simplest and most compelling reason is as follows. With 80 per cent of the population living in markets subject to rent control and turnover rates at historic, near-single-digit lows, the majority of any multi-family REIT’s portfolio is subject to renewals capped at 2-3 per cent. Where excess SPNOI and NAV growth occurs is in the balance – the portion of the portfolio that turns over and can be marked to market at rents substantially higher than in-place. Therefore, the REIT is poised to deliver excess growth should either have the highest turnover rate or the highest mark-to-market. It just so happens that InterRent has both.”