TSX:CHP.UN - Post Discussion
Post by
retiredcf on Jul 18, 2024 1:14pm
TD
Q2/24 PREVIEW FOR RETAIL-FOCUSED REITS
THE TD COWEN INSIGHT
We expect continued strong operating metrics for Retail-focused REITs as they report Q2/24 results over the coming weeks. In addition to commentary on expectations for each Retail-focused REIT, this report also highlights what we see as an extreme valuation discrepancy that currently exists between our Canadian Retail REIT coverage universe and the U.S. peers.
Sustainably Strong Operating Fundamentals (figures 2 & 3). Although two of the larger Retail REITs (RioCan & SmartCentres) saw noticeable occupancy declines in Q1/24, we see
a low likelihood of a repeat. Occupancy rates for the remaining peers in Q1/24 were at/ near historical highs. Rent spreads on new and renewal leasing are also at/near historical highs. Key drivers supporting these results include the demand-supply imbalance that
has materialized in recent years, given Canada's strong population growth (+8% since pre- pandemic) has been paired with very little construction of new retail space (market rents
in most cases are still not high enough to induce development). The result has been a 6% decline in Canada's per-capita retail space since 2017 (Figure 1). Also, the shift toward more high-density housing and less single-family detached homes is increasing the number of addressable households in many shopping centre trade areas across the country. Finally, store closures over the past decade by retailers such as Target, Sears, and a few other national chains (in addition to the turnover of some weaker retailers during the pandemic) have paved the way for rapid growth of stronger retailers, which we believe offer far greater stability (e.g., Winners, Marshalls, HomeSense, and Dollarama). All these, we believe, mean the tenant bases today of most shopping centres are the strongest in several years. We reiterate our expectation of recurring SPNOI growth in the 2-3% range with higher stability vs. prior years.
Historically Wide Valuation Discount vs. U.S. peers (Figure 4, 5 & 6). On P/AFFO, U.S. Retail REITs are trading at a 45% higher multiple vs. the Canadian Retail REITs (i.e. 18.8x vs. 12.9x), well above the historical average of a 19% premium. Similarly, the U.S. peer average P/NAV of 95% is 10% above the Canadian group and well above the historical average of a 5% relative discount. With similar AFFO growth rates and a higher cash yield, we believe Canadian Retail REITs are trading at an unwarranted discount to their U.S. peers.
CHOICE PROPERTIES REIT (BUY-rated, $15.00 Target Price)
FFO/AFFO: We expect CHP to deliver among the highest growth rates within the group in Q2/24, with FFO/unit +5% after adjusting for the lease termination income in Q2/23 (+1% unadjusted), and AFFO/unit +5%. Occupancy: We expect occupancy remaining steady (Q1/24: 97.9%). SPNOI: We expect steady SPNOI growth, consistent with guidance. Guidance: We do not expect any change in CHP’s targets for 2024: stable occupancy, 2.5-3.0% SPNOI growth, and 2-3% growth in FFO/unit to $1.02-$1.03.
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