Raymond James analyst Brad Sturges expects a “relatively better backdrop” for Canadian real estate investment trusts in 2024 to generate positive total returns.
“For covered Canadian REIT/REOCs, we are forecasting average 2024 total returns in the 20-25-per-cent range, reflecting average distribution yields of 5 per cent, average 2024 AFFO [adjusted funds from operations] per unit growth of 9 per cent, and a potential P/AFFO multiple recovery in the 2-3 times range (equal to 5-10-per-cent average unit price appreciation),” he said in a research report titled Don’t Call it a Comeback, Cdn REITs Offer Attractive Returns For Years.
“The S&P/TSX Capped REIT Index (Capped REIT Index) has outperformed the TSX in 13 out of last 24 years (approximately 55 per cent of the time), averaging 3 percentage points (pp) in annual outperformance. However, the Capped REIT Index underperformed the TSX in the last two consecutive years of 2022 and 2023 by 11 pp and 9 pp, respectively. Since 2000, the Capped REIT Index has relatively underperformed the TSX for 2 consecutive years in only 1 other time period, which was heading into the global financial crisis (GFC) in 2007 and 2008. We believe the best case scenario for the Canadian REIT sector to generate improved 2024 total return performance year-over-year after 2 consecutive years of underperformance would be a shallow, soft-landing Canadian economic recession, combined with a relatively stable or declining interest rate environment.”
After 2023 was “another year of relative sector underperformance in a volatile interest rate environment,” Mr. Sturges thinks defensive investment attributes, including strong balance sheet metrics and the potential to generate above-average AFFO per unit growth, are likely to be important for relative outperformance in the current calendar year.
“While we are generally forecasting modest refinancing headwinds for the majority of covered Canadian REIT/REOCs, both NexLiving and InterRent are uniquely positioned to possibly benefit from AFFO/unit tailwinds from refinancing 2024E maturing debt at lower average interest rates,” he said. “Overall, we forecast NexLiving (up 23 per cent year-over-year), Minto (up 18 per cent), InterRent (up 16 per cent), Tricon (up 14 per cent), and StorageVault (up 14 per cent),” he said.
“Our preferred Canadian property sector rankings include: 1) Canadian multifamily rental (MFR); 2) industrial; 3) US residential; 4) retail; 5) storage; and 6) office. Our Strong Buy rated stocks include Granite, InterRent, and Tricon. We also highlight Outperform rated stocks DIR, Flagship, Killam, Minto, NexLiving, and Primaris to round out our current list of preferred stocks. 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.”
Slightly raising his 2024 iFFO/unit and AFFO/unit estimates by 1-2 per cent, leading to modest increases to many of the target prices of equities in his coverage universe.