Inside the Market’s roundup of some of today’s key analyst actions
The outlook continues to remain "favourable" over the next several months for Canadian real estate investment trusts, according to Desjardins Securities analyst Michael Markidis.
Though the S&P/TSX Capped REIT Index has generated a year-to-date total return of 24 per cent, which he notes is "relatively consistent" with a 26-per-cent total return for U.S REITs (through the MSCI US REIT Index) and the 20-per-cent total return for the broader TSX, Mr. Markidis thinks more gains are likely, pointing to a supply deficit in Ontario, expressing little concern about the impact of the federal election and noting a "strong" bid for commercial real estate in the private market.
“Notwithstanding continued weakness in the resource sector, the Canadian economy is performing well,” he said in a research report on the sector released late Thursday. "Year-over-year real GDP growth is trending between 1.5 per cent and 2.0 per cent. Reflecting Canada’s liberal immigration framework, population growth is running at 1.4 per cent (vs the long-term average of 1.1 per cent); we believe this performance stands out vs that of most other developed countries. Canadian household debt remains stubbornly elevated; however, employment growth over that past 2–3 years has been strong, particularly in service-oriented industries. At a high level, we believe these factors are supportive of real estate fundamentals. In contrast to monetary policy easing in other major markets, the Bank of Canada has stood on the sidelines—since implementing a 25 basis points hike in October 2018, it has held the overnight rate at 1.75 per cent. However, over the same period, investors have benefited from a 100 basis points decline at the long end (10-year) of the curve.
"The demand for real estate is strong—we would not be surprised if national investment volume exceeds $40-billion for the third consecutive year—and just when you thought cap rates couldn’t possibly go any lower, we have seen a Class B office property in Toronto and an industrial portfolio in Montréal change hands at sub-4-per-cent cap rates over the past several weeks."
In the report, Mr. Markidis made a trio of rating changes to REITs in his coverage universe.
He raised his rating for Boardwalk Real Estate Investment Trust (BEI-UN-T) to “buy” from “hold” with a $50 target, up from $48. The average target on the Street is $49.95.
“BEI has underperformed Canadian multifamily peers for a prolonged period,” the analyst said. “Our shift to a positive stance is predicated on what we see as an improved supply/demand balance in BEI’s key markets (population growth in Calgary and Edmonton has accelerated while housing starts have continued to trend gradually lower). As a result, we are starting to think that our same-property revenue growth outlook of 3.5 per cent through 2021 may ultimately prove to be conservative. Beyond this, we point to BEI’s below-average payout ratio (sub-40 per cent) on our 2020 estimates and moderating capital intensity, both of which should support NAV growth and continued deleveraging.”
He downgraded both Northview Apartment Real Estate Investment Trust (NVU-UN-T) and Allied Properties Real Estate Investment Trust (AP-UN-T) to “hold” ratings from “buy.”
For Northview, he kept a $29.50 rating, which falls just short of the consensus of $29.95.
“We really like the multifamily space, NVU’s Ontario weighting (as a percentage of estimated FTM NOI) has climbed to the mid-30s and the high-end renovation program is generating solid returns,” he said. “That said, given the geographic composition of the portfolio (significant presence in secondary and tertiary markets), we believe the disconnect between NVU’s sameproperty revenue growth vs other multifamily peers could widen over the next 12–18 months.”
Mr. Markidis increased his target for Allied to $57 from $53, which exceeds the consensus of $53.02.
“This is primarily a relative valuation call; the unit price is up 9 per cent since our Aug. 1 comment, pushing the premium to our spot NAV to 17 per cent (4.2-per-cent implied cap rate),” he said. “Our forecast contemplates mid-single-digit NAV growth; however, we are becoming more cognizant of concerns in relation to a global economic slowdown and the potential impact that might have on leasing velocity.”
At the same time, the analyst said he’s “sticking with the same three horses” for his top picks in the sector.
They are:
InterRent Real Estate Investment Trust (IIP-UN-T) with a “buy” rating and $17.50 target. Average: $15.94.
Minto Apartment Real Estate Investment Trust (MI-UN-T) with a “buy” rating and $24.50 target. Average: $24.17.
Dream Industrial Real Estate Investment Trust (DIR-UN-T) with a “buy” rating and $14 target. Average: $13.41.
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Thursday’s “well-attended” Investor Day in New York highlighted that Brookfield Asset Management Inc. (BAM-N, BAM.A-T) “continues to be ‘front foot forward’, with a very strong offensive positioning by virtue of excellent fundraising momentum plus significant liquidity/client capital commitments,” according to RBC Dominion Securities analyst Neil Downey.
In a research note reviewing the event, which included its publicly listed investment vehicles, including Brookfield Infrastructure Partners L.P. (BIP.UN-T, BIP-N) and Brookfield Renewable Partners L.P. (BEP.UN-T, BEP-N), Mr. Downey said “collapsing” interest rates may “turbo-charge” fundraising.
"Q2/19 FBC [fee bearing capital] of $164-billion was up $35-billion (27 per cent) year-over-year and includes Private Fund FBC of $84-billion and Listed Partnership FBC of $65-billion," the analyst said. "This year’s collapse in global interest rates (e.g., the 10Y UST yield started 2019 at 2.7 per cent and is now 1.7 per cent; long-rates in Europe and Asia are negative) is likely to drive a continued increase in institutional capital allocations to 'real assets' and to larger/proven global alternative asset managers like BAM. BAM believes its next round of flagship funds could raise $100-billion of new FBC over the 2021-24 time frame."
Mr. Downey also emphasized Brookefield Asset's "record" corporate liquidity of US$6.5-billion in the second quarter, which he said is an all-time high.
"Next week, the Oaktree transaction will draw down liquidity by $2.4-billion," he said. "After operating costs, taxes and common dividends, corporate liquidity recharges at a rate of $1.5-billion annually. Including liquidity at the core operating platforms (BEP, BIP, BPY, BBU) and $35-billion of uncalled private fund commitments, the organization’s total liquidity is at an all-time high of $49-billion. BAM seems highly attuned to global risks (e.g., upside down European rates; currency wars; and, political extremes) in the face of an extended economic expansionary cycle. While 'excess' liquidity is a drag on short-term returns, history shows that capital becomes the most valuable when it becomes more broadly scarce."
Also noting the acquisition of Oaktree Capital, which is expected to close on Monday, brings "strategic counter-cyclical investment strategies," Mr. Downey increased his target for Brookfield Asset shares to US$57 from US$54, keeping an "outperform" rating. The average on the Street is US$59.86.
“We view BAM as a core holding for most Canadian equity portfolios,” he said.
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Separately, Mr. Downey raised his target for Brookfield Infrastructure Partners to US$53 from US$50, keeping an “outperform” rating. The average is US$48.82.
“We expect the creation of BIPC to broaden the shareholder base and drive valuation upside,” he said. "We view the plan as a directional positive for the units given investment community feedback with respect to some investors not wanting to hold limited partnership units (i.e., wanting shares of a corporation), whether that be for philosophical, investment mandate or tax reasons. Further, the move could ultimately become a long-term positive if the new shares are included in various U.S. indices.
"Capital recycling remains a key strategy. BIP's long-standing strategy of monetizing mature assets at attractive valuations and deploying that capital into assets with stronger cash yields and/or growth profiles remains intact. Specifically, BIP remains on-track to realize $1 billion of asset sale proceeds in 2019 with a target of monetizing an additional $1 billion of assets in 2020."
Elsewhere, Industrial Alliance Securities analyst Jeremy Rosenfield hiked his target to US$52 from US$49 with a “buy” rating.
Mr. Rosenfield said: “We continue to view BIP as the most diversified way for investors to play the broader long-term infrastructure investment theme, with (1) access to a global diversified infrastructure investment platform, (2) defensive regulated/contracted cash flows, (3) visible cash flow growth, and (4) attractive income characteristics. We continue to see some upside to the shares from the current level, supported by the introduction of a corporate ownership option.”
Mr. Downey lowered his target for Brookfield Property Partners LP (BPY-Q, BPY-UN-T) to US$23 from US$24 with an “outperform” rating. The average is US$22.81.
“Q2/19 Core Retail same-store NOI declined 1.4 per cent, due to the impact of the tenant bankruptcies. It is this performance metric and ongoing (e.g., Forever 21) retailer turmoil that investors seem to be focused on. BPY states that it still expects leased area to reach 96 per cent at Q4/19 (95 per cent at Q2/19) on the back of completed leasing. In our view, Core Retail performance is, in investors’ eyes, an operational 'show me’ story.”
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With its Kiena development in Val d’Or, Que., continuing to “impress,” Canaccord Genuity analyst Tom Gallo raised his rating for shares of Wesdome Gold Ltd. (WDO-T) following Wednesday’s resource update.
"This update continues to demonstrate the robust nature of the Kiena resource, which is still open at depth," said Mr. Gallo. "The Deep A Zone remains open up plunge towards the VC zone and down plunge. Wesdome is developing an exploration drift at the 79m-level to specifically test the down plunge extensions of the VC6 and VC1 zones and the transition to the A Zone along the same structure. The company has five drill rigs testing the A Zone and results will be incorporated into technical studies that could support a potential restart of Kiena. A preliminary economic assessment is expected in H1 2020. In addition to underground drilling, the company is commencing a surface exploration program to search for parallel zones to the A zone.
"Kiena has a fully permitted complex with a 2,000tpd mill and a ramp system to 1050m. The company believes that with minimal capex, approximately $60-million, Kiena can come online quickly; in our view, a majority of the capex will be used for development as well as for the installation of a gravity circuit into the mill. Wesdome has $27-million in cash and believes that it can fund most of the Kiena development through this and cash flow from its Eagle Complex, although we believe Wesdome will need to raise some equity to fund the capex. Wesdome continues to trade at a premium to peers at 1.03 times vs. 0.66 times P/NAV."
After raising his net asset value for the project to $467-million from $419-million, which now represents 46 per cent of his total NAV estimate, Mr. Gallo moved Wesdome shares to “buy” from “hold” with an $8 target, up from $7.25 and above the $7.85 average.
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Pointing to its “attractive” free cash flows, dividend yield and asset, CIBC World Markets analyst Oscar Cabrera initiated coverage of Labrador Iron Ore Royalty Corp. (LIF-T) with an “outperformer” rating.
“We estimate LIF can generate strong free cash flow (FCF) (9.5-per-cent average FCF yield per year over the next 10 years), backed by high-quality iron ore and logistical assets located in a low-risk jurisdiction and operated by a best-in-class miner (Rio Tinto),” he said. “We expect this to allow LIF to sustain an attractive cash distribution policy, with a dividend yield averaging 8.0 per cent over the next 10 years. We note that the majority of our total return estimate for LIF comes from capital gains as concerns about a global economic slowdown recede and LIF shares normalize close to their historical 0.9 times P/NAV (currently at 0.5 times vs. peers at 0.8 times).”
Mr. Cabrera set a $35 target. The average on the Street is $34.
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In other analyst actions:
Canopy Growth Corp. (CGC-N, WEED-T) was downgraded to “neutral” from “buy” by Bank of America Merrill Lynch, which thinks the Canadian industry is set to take a pause in the second half of the year and potentially flatten. The firm lowered its target to US$27 from US$46. The average is US$35.69.
David Leeder