April 8, 2025
Canadian Real Estate Investment Trusts
Quarterly Review & Outlook – Q2/25: Tools to cope with anxiety
Our view: As tariff concerns dominate market moves, it’s hard not to feel anxious about “everything, everywhere all at once”. Still, we believe the sector is well-equipped to work through challenges, supported by record liquidity levels, decent fundamentals, a larger cushion for error in valuations, and potential further bond yield compression. Top picks reflect a mix of attractive growth, defense, and/or value: BEI, CAR, CIGI, CSH, DIR, FCR, GRT, HOM, HR, IIP, KMP, MHC, MI, MRG, PMZ, REI, SRU, SVI.
Highlights
A decent start...and then “liberation day” came. The TSX REIT Index registered a +2% total return in Q1/25, in line with the TSX Composite (+2%) and ahead of the S&P 500 (-4%). Relative to global listed real estate counterparts, Canadian REITs modestly outperformed the US (+1%), Asia (-1%), and Europe (-1%). However, since the US government announced reciprocal tariffs on Apr-2, equity markets have retreated in size, including the TSX Composite (-8% to Apr-4) and S&P 500 (-11%). REITs have not gone unscathed, yet relative to broader equity markets have held in better in Canada (-5%) and the US (-8%).
Sector is not immune to tariff anxiety, but is well-equipped to cope. Canada may have side-stepped a bigger bullet from US reciprocal tariffs but is certainly not immune from spillover effects and previously announced tariffs that remain in place. As noted in February, we believe earnings revision risks skew to the downside amid prospects of slower economic traction. Notably, we see the potential for more pronounced negative impacts on demand for industrial, while seniors housing, multi-family, and defensive retail should be more insulated. Still, on the whole, we believe the sector is in good form to navigate with: 1) record high liquidity ratios & reasonable leverage; 2) sound fundamentals in most property types; 3) further anticipated BoC policy easing; and 4) valuations that are well within reason. As well, a pullback in bond yields amid a flight to safety should provide a degree of downside support.
Recommendations reflect a mix of operational resilience, quality, and valuation. Seniors housing is at the top of our pecking order (CSH preferred pick), with valuations well-supported by superior earnings growth, followed by multi-family (good defense, plus SP NOI growth should remain above historical levels), and retail (good value for solid fundamentals, quality, and defense, particularly FCR, SRU). Industrial valuations seem excessively discounted among our top picks (DIR, GRT), though confidence in the earnings picture will likely need to build for investors to narrow the gap. We also see good value in self-storage (SVI) but acknowledge the effects of weaker near-term consumer and housing activity.
Larger margin for error as valuations dial back. At Apr-4, our universe trades at 22% below NAV, 14x N12M AFFO (7.1% AFFO yield), and a 7.2% implied cap. The AFFO yield (421 bps) and implied cap rate (431 bps) spreads to the 10Y GoC yield have risen to levels above long-term averages, after spending the better part of the last four years below. We acknowledge macro clarity is likely required to stimulate stronger inflows. Still, we believe current levels provide more room for error, particularly in our top picks.