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Desjardins Capital Markets Says Multifamily Strongest Sector

Report Calls For Overall Total Returns of 7% to 12% in REIT Sector, Sees Larger Apartment Returns
January 12, 2018
Desjardins Capital Markets has named the multifamily segment as its top pick for 2018 within the publicly-traded real estate investment trust world, calling for total returns of 7% to 12% in the sector.

"In apartments we trust," the financial services firm says in a 17-page report by analyst Michael Markidis, on the outlook for 2018. "We believe that southwestern Ontario, Ottawa and Montréal are in the early to middle stages of a strong rental growth cycle, and fundamentals in Calgary and Edmonton finally bottomed in late 2017 and are poised for a multi-year recovery."

The decision to recommend an overweight position to the apartment sub-sector comes even after the fourth quarter of 2017 delivered results that saw the five multifamily companies that Desjardins cover have a simple average total return of 13%.

The firm’s top picks are InterRent, Northview Apartment and WPT Industrial, predicting a simple average expected total return for the three of 16% in 2018.

Desjardins said the total return of 6% generated in the fourth quarter by the S&P/TSX Capped REIT Index, bringing the 2017 performance to 10%, still leaves upside in 2018.

The firms says its sector total return of 7% to 12% is predicated on an upward shift in the long end of the curve, offset by continued yield spread compression. "An economic recession in North America and/or NAFTA withdrawal are the primary potential risks to our outlook," it said.

Desjardins had a hold on Canadians Apartment Properties but says an approximate 5% pullback in the stock since mid-December and an upward revision in net asset value has moved the REIT into buy territory.

Looking back on the $3.8 billion deal by Blackstone Property Partners to buy Pure Industrial this month, Desjardins has now moved that REIT to hold. "Reflecting our view that an offer superior will not likely emerge, we have downgraded," the report states.

Desjardins has seven key themes for the REIT market in 2018, led by consumers continuing to drive the economy. It notes real GDP was up 2.9% in the first nine months of the year, compared to the prior year, driven by consumer spending.

On retail sales, the firm notes once automotive dealers and gas stations are removed, monthly sales growth has ranged from 4% to 6% throughout most of 2017. "Retail sales are growing at a healthy clip, so why isn’t every landlord smiling?" the report asks, before noting a rise in the minimum wage and more space coming off the market from the liquidation of Sears are putting a strain on fundamentals.

Desjardins says employment growth in Alberta is finally happening in the energy-dependent province but the jobless rate remains elevated. It does point to positives in the fact that one million new permanent residents are coming to Canada through 2020 but warned demand for industrial space is sensitive to economic cycles. With changes to monetary policy through the raising of the overnight lending rate, the firm says the change in monetary policy is "not necessarily a death sentence" for the Canadian REIT sector.

Finally, the report says investors need to think about the North American Free Trade Agreement. "It’s time to start considering the potential fallout in the event that the U.S. triggers a withdrawal," Desjardins concludes.

In addition to Markidis, analysts Alex Leon and David Chrystal worked on the report.

Garry Marr, Toronto Market Reporter  CoStar Group   
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