Citing “the positive total return performance due to a change in the interest rate environment in 3Q24,” Raymond James analyst Brad Sturges increased his price targets for Canadian REIT/REOCs his coverage universe by a “modest” 3 per cent on average on Friday.
“Canadian REIT/REOC market valuations remain attractive even after relative outperformance in recent weeks,” he said.
“The average NAV estimate discount for covered Canadian REIT/REOC is forecasted at 17 per cent, which compares to a 5-year historical average NAV estimate discount of 14 per cent. We highlight that large-cap Canadian REIT/REOCs under coverage now trade at an average 11-per-cent NAV estimate discount, while small-cap Canadian REIT/REOCs remain more deeply discounted (average NAV estimate discount: 22 per cent). We highlight Parkit Enterprises Inc. (Parkit), StorageVault Canada Inc. (StorageVault), NexLiving Communities Inc. (Nexliving), PROREIT, and InterRent as covered real estate stocks that are trading well below their respective 5-year average premium or discount relative to estimated NAVs. Canadian REIT/REOCs across our coverage universe (excluding micro-cap, Parkit) continue to trade at an 3 times lower P/AFFO versus their 5-year historical average. Notably, NexLiving, Allied, InterRent, StorageVault, and Minto currently trade between 6 times to 10 times below their respective 5-year historical averages on a P/AFFO multiple.”
“Our preferred Canadian property sector rankings include: 1) Canadian multifamily rental (MFR); 2) industrial; 3) retail; 4) U.S. residential; 5) storage; and 6) office.”
Mr. Sturges made a pair of recommendation changes on Friday.
* Boardwalk REIT to “outperform” from “strong buy” with a $100 target, up from $96. The average on the Street is $91.20.
“Boardwalk’s rating [is] adjusted to outperform after strong total return performance in the past 2 years,” he said. “Boardwalk’s above-average near-term NAV/unit and 2025E AFFO/unit growth prospects now appear to be more fairly valued after significantly outperforming the broader Canadian REIT/REOC sector in 2023 and 2024 YTD, with Boardwalk trading in-line with its NAV/unit estimate of $86.50 per unit (utilizing a 5.25-per-cent average applied cap rate). That said, our new Outperform rating for Boardwalk reflects: 1) above-average near-term SP-NOI growth prospects driven by further market MFR rent growth in Western Canada, and its SP-NOI margin expansion potential; 2) greater non-regulated MFR market exposure (73 per cent of suites); and 3) above-average exposure to Canada’s more affordable MFR markets, among other factors.”
* Killam Apartment REIT to “strong buy” from “outperform” with a $24 target, up from $22.25. Average: $22.60.
“Killam’s rating increased to strong buy due to its improved 2025 FD AFFO per unit growth profile,” he said. “After a relatively slower AFFO/unit growth year expected in 2024, we are forecasting Killam to generate low-double-digit 2025E FD AFFO/unit growth year-over, driven by capturing the REIT’s embedded rent MTM growth opportunity of 25 per cent at June 30, combined with greater NOI contribution from the lease-up of non-stabilized, recently completed development projects, and reduced financing cost headwinds expected next year. Further, we view Killam’s relative valuation to be attractive, trading at an 9-per-cent discount to our NAV/unit estimate of $22.50/unit, and at 18 times 2025E AFFO, or 3-4 times lower than the simple average of 22 times for its large-cap Cdn MFR REIT peers.”
The analyst added: “Our Strong Buy rated stocks include Flagship, Granite, InterRent, and Killam. We also highlight Outperform rated stocks Crombie, DIR, NexLiving, Primaris, and PROREIT to round out our current list of preferred stocks,” he said. “Our preferred Canadian REITs generally feature strong balance sheets (e.g., low financial leverage, ample balance sheet liquidity, and limited floating rate debt), below-average AFFO/unit payout ratios, portfolios weighted towards ‘high-growth’ markets, above-average organic and AFFO/unit growth prospects, NAV/unit and AFFO/unit discount valuations, and may benefit from 1 or more near-term positive catalysts.
“We believe the vast majority of Canadian REIT total return performance in 2024 YTD has been driven by a positive change in the interest rate environment. While tactically we believe interest rates could remain a near-term tailwind for Canadian REIT/REOC valuations, we expect investor focus to shift back to Canadian economic and underlying property fundamentals. We maintain our belief that the dislocation between public unit prices and underlying estimated NAVs may once again prove to be a very attractive buying opportunity. Key potential near-term positive catalysts to keep in mind for the Canadian REIT sector include: perceived lower investment risk of a deeper economic recession in Canada; further interest rate cuts by the Bank of Canada (BoC) and the Federal Reserve (the Fed); increasing transactional activity in the direct property market that validates estimated NAVs; positive SP-NOI and AFFO/unit surprises; and potential Canadian REIT/REOC M&A/privatization transactions.”