While acknowledging “kinks in the macro picture still need to be ironed out, but on the whole,” RBC Dominion Securities analysts Pammi Bir, Jimmy Shan and Tom Callaghan see “support for stronger 2024 returns and fund flows” for Canadian real estate investment trusts, pointing to “an anticipated pivot to monetary easing, moderate economic growth, stabilizing long-bond yields, healthy earnings growth, and reasonable valuations.”
“With the BoC tightening cycle seemingly done, rate cuts anticipated to start in Q2/24, and forecasts for long-bond yields to stabilize at levels well below the early October highs (based on RBC Economics’ calls), we think the setup for 2024 looks better,” they said. “Indeed, as recent weeks have demonstrated, a rally in the sector could be front-end loaded as CDN REITs have a strong track record of outperformance in the 3-12 months leading up to the initial rate cut of past easing cycles. As well, we believe the sector remains on sound footing to navigate an economic slowdown with 1) healthy fundamentals across most property types, 2) moderate earnings growth (2024 estimate up 3 per cent), 3) strong liquidity, 4) potential easing of upward pressures on cap rates, and 5) valuations that are well within reason. Furthermore, we think deal flow could ramp-up in a more stable rate environment, providing better visibility into pricing.”
In a research report released Friday, the analysts said they expect the sector’s organic net operating income growth to “moderate from record levels (up 5 per cent over last 12 months) as the economy slows.”
“That said, we expect comparatively stronger operating results from multi-family (demand tailwinds from outsized population growth, housing affordability), seniors housing (pent-up demand, fading cost pressures), industrial (significant mark-to-market opportunity on in-place rents), and self-storage,” he said.
While valuations have “recouped some lost ground,” the analysts think they are now “quite reasonable.”
“Aided by the sharp drop in bond yields, the TSX REIT Index has staged an impressive 18-per-cent rally since hitting year-to-date lows in Oct,” they said. “The sector’s NAV discount, however, remains substantial at 24 per cent. We think current levels provide a good margin for error but acknowledge that slow price discovery has investors placing more weight on cash flow multiples & implied cap rates. ... In short, with the 2024 setup teed up more favourably, we see room for further upside in valuations.”
The analysts’ securities with “outperform” recommendations are:
- Allied Properties REIT with a $21 target. The average target on the Street is $21.20.
- BSR REIT with a US$15 target. Average: US$15.09.
- CAP REIT with a $60 target. Average: $55.04.
- Colliers International Group Inc. with a US$121 target. Average: US$122.86.
- Chartwell Retirement Residences with a $14 target. Average: $13.63.
- Dream Industrial REIT with a $16 target. Average: $15.96.
- Flagship Communities REIT with a US$20 target. Average: US$20.25.
- First Capital REIT with a $17 target. Average: $16.53.
- FirstService Corp. with a US$187 target. Average: US$167.14.
- Granite REIT with a $86 target. Average: $86.75.
- InterRent REIT with a $16 target. Average: $14.39.
- Killam Apartment REIT with a $23 target. Average: $21.29.
- Minto Apartment REIT with a $20 target. Average: $18.14.
- Morguard North American Residential REIT with a $20 target. Average: $21.
- RioCan REIT with a $22 target. Average: $21.63.
- SmartCentres REIT with a $29 target. Average: $26.03.
- StorageVault Canada Inc. with a $6 target. Average: $5.80.