Scotiabank analyst Mario Saric compares current REIT valuations to 2007 and finds the sector with upside now,
“Let’s take it back to 2007. There has been a lot of chatter on recent spiking U.S. 10YR hitting prior peak of 5.2 per cent in June 2007 (Canada = 4.6-per-cent peak in June 2007). As a result, we thought it would be interesting to compare current valuation to then ... Overall, the CAD REIT Index is 3 per cent below June 2007 (on price-only) and is trading approximately 2 times below June 2007 P/AFFO [price to adjusted funds from operations] and at a similar implied cap rate (6.6-6.7 per cent) despite the current 10YRGOC of 3.8 per cent sitting 80 bp [basis points] below the 4.6 per cent. CAD REITs are trading at a slight premium to TSX (vs. slight discount), with the reverse true vs. domestic yield peers … Our avg. NAVPU [net asset value per unit] was uo 1 per cent from June 2007 to June 2008, but CAD REITs lagged the TSX by 21 per cent (outperforming CAD Financials by 2.5 per cent), driving the P/NAV [price to net asset value] discount to 15 per cent (vs. the 23 per cent today). Bottom-line, we believe the analysis supports the view continued economic resilience = REIT unit price upside”
Mr. Saric also reiterated his top picks,
“Our Top Growth Picks = BAM, CAR, DRR, GRT, IIP, SVI. Our Top Value Picks = AP, BN, CRR, CSH, HOM, MHC, REI, TCN. Our Top Income Picks = CHP, CRT. We still believe CAD REITs should have a good 2024 (assuming a “softish” landing & credit spread compression) on improved FFOPU[ funds from operations per unit] growth”