2021 Mid-Year Outlook Update
Increasing Target Prices and Industrial NAVs
Raising Full Year 2021 Return Expectations to 30%
Year-to-date, the REIT index has generated a 21.6% total return, outperforming the TSX composite at 17.4% [Exhibit 2], and already meeting our initial 20%-plus total return forecast should vaccine distribution accelerate and case counts decline. We now expect total returns for 2021 to be in the 30% range.
For the remainder of 2021, our "re-opening trade" bias remains largely unchanged, with Canada's vaccine rollout acceleration providing us further clarity and confidence on the trajectory of the recovery. However, we acknowledge we do not have 100% certainty on the full reopening given the potential impact of the Delta variant.
Overall, as we emerge from the pandemic we believe REIT fundamentals across most property sectors have potential to be as strong (and stronger for industrial, apartments, and ultimately seniors) as they were in early 2020.
With this report, we are increasing the majority of our target prices by an average of 4%, and also NAV estimates for those REITs with industrial property exposure to reflect pricing on the recent Artis GTA transaction (link).
Revisiting and Reiterating Initial Preferred Investing Themes
Our initial preferred REIT investing themes for 2021 were industrial, apartments, and discounted retail.
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All three discounted retail names (First Capital, RioCan and SmartCentres) were among the strongest performers YTD, with 33%-35% total returns. According to Exhibit 1, First Capital and RioCan still have good relative upside versus pre- pandemic valuations.
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Industrial REITs as a group only slightly outperformed, with currency headwinds holding back unit price performance for Dream Industrial and Granite. Summit led the group, with WPT (USD price) not far behind. We believe the change in the industrial property landscape brought about by the pandemic more than justifies the higher valuations. With fundamentals expected to continue to strengthen, and cap rates trending lower on the back of growing demand and a lack of new supply, we see good runway for continued outperformance over the latter half of 2021.
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Apartment REIT returns have generated middle-of-the-pack returns YTD, consistent with our view that this sector's outperformance would be back-half weighted. We believe valuations, which are relatively in-line with pre-pandemic levels, will benefit meaningfully in the second half of the year as the recovery in fundamentals begins to accelerate.