National Bank Ahead of second-quarter earnings season for Canada’s real estate sector, National Bank Financial’s Matt Kornack and Tal Woolley expect the trend of similar returns regardless of asset classes to continue.
“Year-to-date price performance across the asset classes has evened out expected total returns, despite target cuts across our universe,” he said. “Mean returns for multi-family (up 18 per cent), retail (up 18 per cent), industrial (up 18 per cent) and seniors housing/healthcare coverage (up 14 per cent) are similar. We see opportunities in each of these segments and would recommend a balanced portfolio of our highest total return names across asset classes. At this point in time, apart from office (total return expectation of 9 per cent), we are seeing high occupancy rates and solid rent growth outlooks, driven by limited development and immigration-fuelled demand (now being seen in commercial, not just residential uses).”
In a report released Tuesday, the analysts lowered made broad target price reductions by an average of 8 per cent to equities in their coverage universe “as rates remain elevated.” Their funds from operations per unit projections slid by an average of 1 per cent due largely to reduced transaction activity and higher financing costs.”
Changes to their “focus ideas” are: Industrial: Dream Industrial REIT (“outperform”) with a $17.50 target, down from $18.50. Average: $17.27.
Analysts: “Our highest total return to target in industrial goes to Dream Industrial as the REIT remains relatively inexpensive vs. its asset exposure. On the latter, DIR is the best way to get exposure to the strong GTA/GMA industrial markets and we view it as the closest proxy for an urban Canadian play with a portfolio primarily located in higher barrier to entry markets. The current implied cap rate represents a positive spread to financing costs, notwithstanding a still juicy MTM opportunity providing the best organic growth profile across the Canadian peer set.”