BMO BMO analyst Jenny Ma is adopting a more cautious outlook for the Canadian real estate sector,
“Canadian Real Estate: Shifting to a More Conservative Stance . Taking into account myriad new risks that have emerged, in our view investors should take a bottom-up approach to investing in Canadian REITs in the second half of 2022. Characteristics to look for are strong cash flow growth profiles (to outpace inflation in operating costs and higher interest expense), longer weighted average debt terms (to limit exposure to higher interest rates), and discount valuation in the form of lower multiples and deeper discounts to NAV (to limit downside). We are shifting our preferences to reflect a more conservative view. Our pecking order for asset classes are: diversified commercial (for value and downside protection), multifamily (for current valuation reflecting some degree of cap rate expansion and regulatory risks, and a strong long-term growth profile), and retail (for moderate but consistent growth). Our top picks for individual REITs are H&R REIT (HR.UN-TSX; $13.77; OP), InterRent REIT (IIP.UN-TSX; $13.83; OP), Minto Apartment REIT (MI.UN-TSX; $18.60; OP), Crombie REIT (CRR.UN-TSX; $17.26; OP), and RioCan REIT (REI.UN-TSX; $22.68; OP)… YTD, the Canadian REITs under coverage posted a simple average total return of -5.6% while the S&P/TSX Capped REIT Index is -9.2%.”