CIBC CIBC Capital Markets real estate analyst Dean Wilkinson wonders whether REIT valuations have bottomed in his monthly report called Wake Me Up When September Ends,
“While the BoC’s initial 25 bps rate cut is unquestionably positive, the short-lived strength in the sector leads us to believe that a much more material reduction is required in order to spur a return to historical valuation levels (or, at a minimum, approach them). We believe additional cuts are needed to the short end of the curve to result in a further flattening and outperformance of the REIT sector at large … Valuation—Are We There Yet? REITs within our coverage universe are trading at an average ~23% discount to NAV (vs. a ~10% historical average) and a ~12.5x 2024E P/FFO multiple (vs. a ~13x historical average). While the discount may seem punitive at face value, should interest rates remain elevated (but stable), we may see a modest increase in consensus [cap rates] beyond those which have already occurred, ultimately serving to narrow the current discount and put the focus back where it belongs—fundamentals … Within our coverage universe, Northview Residential REIT (+13%) and Dream Residential REIT (+6%) posted the largest positive gains, while Inovalis REIT (-20%) and Slate Office REIT (61%) lagged. Year to date, asset class performance is as follows: Hotel (43%), Office (-29%), Industrial (-10%), Retail (-6%), Diversified (-3%), Seniors (-3%) and Apartments (-1%)”
Mr. Wilkinson has outperform ratings on Flagship Communities REIT, Chartwell Retirement Residences, Brookfield Corp., SmartCentres REIT, BSR REIT, Dream Residential REIT, RioCan REIT, Killam Apartment REIT, Minto Apartment REIT, European Residential REIT, Morguard North American Residential REIT and First Capital REIT.