Top picks in REIT sector from BMO and RBC analysts

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Scotiabank analyst Mario Saric compares current REIT valuations to 2007 and finds the sector with upside now,

“Let’s take it back to 2007. There has been a lot of chatter on recent spiking U.S. 10YR hitting prior peak of 5.2 per cent in June 2007 (Canada = 4.6-per-cent peak in June 2007). As a result, we thought it would be interesting to compare current valuation to then … Overall, the CAD REIT Index is 3 per cent below June 2007 (on price-only) and is trading approximately 2 times below June 2007 P/AFFO [price to adjusted funds from operations] and at a similar implied cap rate (6.6-6.7 per cent) despite the current 10YRGOC of 3.8 per cent sitting 80 bp [basis points] below the 4.6 per cent. CAD REITs are trading at a slight premium to TSX (vs. slight discount), with the reverse true vs. domestic yield peers … Our avg. NAVPU [net asset value per unit] was uo 1 per cent from June 2007 to June 2008, but CAD REITs lagged the TSX by 21 per cent (outperforming CAD Financials by 2.5 per cent), driving the P/NAV [price to net asset value] discount to 15 per cent (vs. the 23 per cent today). Bottom-line, we believe the analysis supports the view continued economic resilience = REIT unit price upside”

Mr. Saric also reiterated his top picks,

“Our Top Growth Picks = BAM, CAR, DRR, GRT, IIP, SVI. Our Top Value Picks = AP, BN, CRR, CSH, HOM, MHC, REI, TCN. Our Top Income Picks = CHP, CRT. We still believe CAD REITs should have a good 2024 (assuming a “softish” landing & credit spread compression) on improved FFOPU[ funds from operations per unit] growth”

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RBC Capital Markets analyst Pammi Bir also updated to picks in the REIT sector as part of a second quarter recap,

Our view: Our Outperform ratings include Allied, Boardwalk, BSR, CAPREIT, Chartwell, Colliers, Dream Industrial, FirstService, First Capital, Granite, InterRent, Killam Apartment, Minto Apartment, Morguard Residential, RioCan, SmartCentres, and StorageVault. Q2 results were largely as expected, with a pick-up in earnings growth supported by strength in fundamentals across most property types. Indeed, organic NOI growth is tracking near record highs, with several subsectors in the high-single to low-double-digit percentage range. Still, investor sentiment remains restrained amid rising interest rates and a clouded view on economic traction, with capital flowing to names where fundamentals are strongest. Set against this context, our recommendations remain largely skewed to more operationally resilient subsectors including multi-family, industrial, self-storage, and defensive retail”

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BMO bank analyst Sohrab Movahedi continued to update his view on the sector ahead of imminent earnings reports,

“Across the ‘Big 5′ (excl. BMO) in Q3/23, cash earnings are expected to be down 7 per cent year-over-year (ranging from low single-digit percentage declines at RY, TD, and NA to higher double-digit declines at BNS and CM), largely reflecting higher y/y credit provisions of 32 basis points/$2.6-billion (up from 18bps/$1.4B) and negative operating leverage (softer market related revenue coupled with elevated expenses). We are looking for flat to lower y/y earnings at most key business segments, with U.S & Int’l Banking being the one bright spot. The Canadian bank index’s forward P/E of 9.4 times relative to our 2024E estimates, while at the lower end of the typical 10-12 times forward P/E range, is a reflection of a tough revenue growth environment and higher capital costs, both of which will act as headwinds to a re-rating in the near term. • Our Outperform-rated names remain CM, NA, and CWB”

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Diversion: “‘Near Collisions’ of Commercial Jets Happen All the Time, Horrifying FAA Records Show” – Gizmodo