These three REITs were highlighted from a recent Investor’s Digest of Canada review of 52 income trusts followed by leading analysts across Canada.
Killam Apartment Real Estate Investment Trust (TSX—KMP.UN)
The winds of Killam Apartment REIT are still blowing east, says Echelon Capital Markets analyst David Chrystal. Tightening apartment fundamentals in the tough East Coast real estate market, and a substantial rebound in immigration are shaping up to be the right conditions for Killam to sail ahead of the pack as the analyst’s ‘top pick’ among REITs.
Killam is the largest residential landlord in Atlantic Canada, with an expanding presence in Ontario, Alberta and British Columbia.
Mr. Chrystal notes the federal government is pursuing an ambitious growth policy of adding 1.2 million new immigrants from the years 2021 to 2023.
“After a significant COVID-related slowdown in international immigration in 2020 (down nearly 80 per cent from 2019), we have seen a significant rebound in 2021 (up more than 300 per cent over the first three quarters), particularly in the third quarter, which was just seven per cent below the third-quarter 2019 figure,” Mr. Chrystal explains.
The Atlantic provinces received their pro-rata share of international immigration, while also benefiting from the migration of Canadians from other provinces during the lockdowns. Despite historically tight apartment fundamentals in the Maritimes, the relative affordability of East Coast real estate (versus Ontario and British Columbia) continues to attract domestic migrants there.
Beyond a rising tide of demand on Atlantic shores, CPI (consumer price index) data points to continued pressure on the rental markets. The three Canadian provinces with the highest year-over-year increase in rent in November are New Brunswick (up 7.9 per cent), Nova Scotia (up 7.4 per cent), and Prince Edward Island (up 4.5 per cent).
“We expect continued migration, international and inter-provincial, to drive further tightening in Killam’s core East Coast markets, which should support strong organic growth going forward,” says the analyst.
“Over the course of 2022, we expect Killam to deliver nearly 500 apartment suites across five development projects, with a total cost of about $240 million. While the full funds from operations contribution will not occur until 2023, we expect that completion of these developments could drive a fair value gain of about $65 million (a year), or about $0.60 per unit (on top of the $1.15 expected in 2022).”
Dream Industrial REIT (TSX—DIR.UN)
Dream Industrial REIT is an inexpensive investment proposition for a quality warehouse and logistics name. At least that’s how Scotiabank analyst Himanshu Gupta describes it.
He notes DIR is trading at 19 times its forecast 2023 adjusted FFO (funds from operations) per-unit multiple, just a shade above the average of the entire Canadian REIT sector at 18 times. However, at roughly the same adjusted FFO valuation, he forecasts a 2020-23 estimated adjusted FFO per-unit compound annual growth rate of 13.2 per cent, and the REIT sector at 7.9 per cent.
As such, he calls Dream Industrial “one of the cheapest ways to play the compelling Canadian and European industrial and logistics sector”.
“It is encouraging to see that despite out-sized investment cap rate spreads (cap rate – cost of debt), market rent growth in Europe (i.e. in Dutch, French and German industrial markets) is looking to be in the 2.5 per cent region.
Dream Industrial put out a $250-million Green Bond offering on Dec. 6, 2021, at an effective interest rate of 0.541 per cent annually (after swapping to euro-denominated bonds). Overall cost of debt has reduced meaningfully at 0.85 per cent from 3.4 per cent previously due to DIR’s high exposure to European logistics markets.
The analyst estimates 47 per cent of DIR’s portfolio consists of Ontario and Quebec assets, and 41 per cent in Europe. He expects DIR’s leverage at about 35 per cent proforma $600 million of acquisitions that are set to be completed by the end of the first quarter of 2022.
Dream Industrial REIT is focused on the ownership of Canadian industrial real estate, with a portfolio of 20 million square feet across 223 properties and $2 billion in assets.
Mr. Gupta reiterates a “sector outperform” recommendation. The company’s distribution yields 4.3 per cent as of mid January.
Minto Apartment REIT (TSX—MI.UN)
National Bank Financial analyst Matt Kornack says he may be a little early to upgrade his recommendation for Minto Apartment REIT to “outperform”. He notes a return to lockdowns could realistically curtail operating performance in the first quarter.
Minto Apartment REIT is a small-cap (with a market capitalization of $909 million) apartment property owner of 7,277 units (6,121 adjusted for ownership position) located in major Canadian urban centres of Toronto, Ottawa, Calgary, Montreal and Edmonton.
The analyst comments: “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.”
However, he adds that its relative under-performance of late (strictly from a trading standpoint) offers an attractive entry point if the expectation for improving operating metrics through the balance of the year happens like he hopes.
Mr. Kornack appreciates Minto’s approach to development and the expertise embedded in its platform. For a smaller entity, he says its development loan structure provides a unique mechanism to sustain earnings while securing a high-quality acquisition pipeline.
Minto is in a tight race for the third-highest total return across the analyst’s apartment coverage universe. His top pick for the Multi-Family asset class is CAPREIT (Canadian Apartment Properties REIT), to which he assigns a $70.50 target.
Adding to Minto returns, cash distribution was announced on Jan. 17, 2022. Minto offered its shareholders $0.03958 per unit for the month of January. For the year, that will add up to $0.475 per unit, and yielding 2.09 per cent (as of Jan. 19).
This is an edited version of an article that was originally published for subscribers in the February 4, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •3/1/22 •