National Bank Financial analysts Matt Kornack and Tal Woolley favour “tightening” multi-family and industrial real estate markets to start to 2022.
“By asset class, we see the highest average total returns in our Industrial and Multi-family coverages (22 per cent total returns each),” they said in a research report released Monday. “This is followed by Seniors Housing/Healthcare (another quasi-residential asset class) and Diversified at 20 per cent. Basically, our expectations are stronger for these names due to the favourable supply/demand pictures. We see average total returns of 14 per cent for our Office coverage and for Retail, which still have to resolve questions around growth/occupancy as COVID wears on. Our Special Situations coverage also offers some interesting opportunities in self-storage, single-family housing and manufactured housing (again, all quasiresidential asset classes).”
In the industrial sub-sector, the firm sees rent growth continuing to “surprise to the upside, particularly in gateway markets with limited availability and new developments with higher rents as the only competition. Of late, trading prices retreated on higher bond yields, but we expect the healthy organic growth to drive financial performance and investor interest in 2022.”
Though the analysts caution Omicron will cause “a little operational discomfort” in the multi-family area, they see a “stronger” spring market.
“Operating metrics here remained solid, even with immigration declining during COVID,” they said. “As occupancy normalizes, we anticipate pressure will build for rents. The omicron wave may blunt operating momentum generated through Q4, but we still expect strong spring leasing. If foreign jurisdictions, like the U.S., where both HOM and HR have exposure are any indication rents can accelerate quickly but this will be moderated domestically by rent control regimes.”
In conjunction with the report, Mr. Kornack upgraded Minto Apartment Real Estate Investment Trust to “outperform” from “sector perform,” though warning he “may be a little early to this call as a return to lockdowns could curtail operating performance in Q1/22.”
“That said, relative underperformance from a trading standpoint offers an attractive entry point with the expectation for improving operating metrics through the balance of the year,” said Mr. Kornack.
“The ubiquitous nature of Omicron is changing public perception and may usher in less disruptive public health measures going forward. Looking to jurisdictions that are farther ahead in their infection curves, this wave will certainly be disruptive but likely shorter, sparing the spring leasing season. Meanwhile, trends seen during recent periods of more lax public health measures were supportive of higher occupancy and rent levels. This was without the full benefit of higher immigration rates, which accelerated materially throughout the balance of 2021 and should usher in increasingly positive demand dynamics in 2022.”
Touting its “high-quality portfolio of urban assets” and calling its “development expertise and Minto relationship a plus the analyst,” he kept a $26.25 target for its units. The average on the Street is $27.20.
“Valuation was an impediment historically to our call on the name,” the analyst said. “Recent underperformance offers an opportunity to get in at a reasonable valuation relative to portfolio quality. We also expect improving operating performance combined with weaker prior year comps, driving better organic growth. As noted in our related 2022 outlook and preview, higher cost inflation will be a mitigating force.”
“We like the REIT’s approach to development and the expertise embedded in its platform. For a smaller entity, the development loan structure provides a unique mechanism to sustain earnings while securing a high-quality acquisition pipeline.”