TD Notes REAL ESTATE Q2/24 REVIEW: IN-LINE RESULTS SUPPORT FURTHER VALUATION RECOVERY
THE TD COWEN INSIGHT
Q2/24 AFFO growth was in-line with our expectations with no material changes to our forecasts. Growth should continue accelerating through Q4 and in to 2025 as interest costs cease being a headwind and most sectors benefit from strong fundamentals. We view Cdn REITs as well positioned near-term, particularly if the improving interest rate environment sparks more investor interest and funds flow.
Q2/24 results: Overall AFFO/unit growth* of 3.7% y/y (6.2% incl. Seniors) slightly exceeded our 3.2%/5.5% forecasts. Seniors (+47%) and Residential (+12%) were growth leaders, while Retail (0%) and Office (-12%) lagged. Industrial rebounded to +4%, but missed our +7% forecast. Notable beats* in the quarter came from HR.un (+6% ahead) and FCR.un (+5%), while misses included AP.un (-6%) and SVI (-8%).
Per-unit interest expense growth slowed for the third consecutive quarter to +9% y/y (vs. +34% peak in Q1/23), and further moderation is a tailwind in our forecasts.
More detailed reviews of the Q2/24 results and outlooks for the Retail and Residential sectors are available here: Retail, Residential.
SPNOI growth (ex-Seniors) improved modestly from Q1/24's 4.7% pace to 4.8%, with a slight increase in Retail partially offset by a slight deceleration in Residential (to a still very strong +8.6%). Overall, our SPNOIG forecasts (ex-Seniors) for 2024/25 are largely unchanged at 4.9%/4.8% and our new 2026 estimates reflect a steady pace of +4.7%.
Looking at AFFO growth in H2/24, we see Seniors Housing continuing to lead overall, with Industrial REITs catching up to Residential with high single-digits growth. In 2025, we expect some Retail REITs to join Industrial REITs in delivering meaningfully accelerating AFFO growth.
Estimate and Target Price Changes. Overall, our AFFO estimates were unchanged for 2024 and -1% for 2025 (mainly due to SVI, KMP.un, GRT.un, and DIR.un). Our forecast now calls for 2024/2025/2026 AFFO/unit growth (ex-Seniors) of 3.8%/6.1%/5.5%. We raised eight target prices (Seniors +7%) and reduced two.
Valuation (Figures 11-13). At 82% P/NAV, Canadian REITs are trading above the 76% low
in May, but in our view remain undervalued vs. the 94% post-GFC average. The FFO yield has come down to 9.1%, but the current 6.0% spread to the 10-year GoC bond yield remains undervalued at 110bps wider than the 4.9% adjusted long-term average. Residential REIT trading valuations remain very elevated relative to Retail and Industrial REITs.
Our top picks are CAR.un, GRT.un, REI.un, CSH.un, DIR.un and FCR.un.