REIT analysis and top picks from a Scotiabank analyst

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

Scotiabank real estate analyst Mario Saric’s monthly The REIT Stuff report takes a close look at financial leverage in the sector,

“Bottom line: it appears factors outside financial leverage have been bigger drivers of REIT valuation over time, albeit with financial leverage gaining some prominence since interest rates started moving higher in 2022 … Our top picks generally rank relatively well on both per-unit growth and financial leverage … we think improved per-unit growth may still have a greater impact on valuation multiples over our investment horizon. To the extent a REIT can do both for a sustained period (i.e., FFOPU [funds from operations per unit] -accretive de-levering akin to FCR’s successful accomplishment in 2024), we think the unit price reward would exceed the FFOPU accretion, particularly for REITs with above-average financial leverage … . Within our universe of coverage, REITs that we believe that can benefit most from ‘accretive de-levering’ (historical evidence be damned!) include Allied Properties, Dream Office, RioCan, and SmartCentres … We think better AFFOPU growth at below-average leverage remains appealing. There are 10 REITs in our universe with a 2024A-2026E AFFOPU CAGR exceeding 4.7-per-cent sector average and have net debt/EBITDA below the 9.1 times sector average: GRT, APR, BEI, CSH, DRR, FCR, MHC, PMZ, PRV, and SIA … Our top two preferred asset classes remain Seniors Housing (CSH and SIA are rated SO), followed by Multi-Family (CAR and KMP). That said, we think the emergence of the aforementioned catalysts would likely see Office add to recent outperformance (AP is rated SO). Our preference within Retail is defensive grocery-anchored (CHP, CRR, and CRT are all rated SO)”

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RBC Capital Markets analyst Maurice Choy has just returned from a marketing trip (he doesn’t mention where) and published the following observations,

“Midstream: More questions than answers Across our meetings, we saw strong investor engagement in the Canadian Midstream sector, and undoubtedly, the number one company-specific topic has been Pembina’s Alliance Pipeline. While it seems like this topic has a rather binary outcome, we find that many investors are coalescing around the stock, in recognition of the clarity that may emerge in the coming weeks and the stock’s valuation versus its peers. Other company-specific topics include the commercial in-service date of TC Energy’s SGP, and the Keyera/Plains deal (e.g., Competition Bureau, impact on Pembina, AltaGas, and Brookfield Infrastructure). Overarching these topics has been a discussion on what energy infrastructure projects may emerge now that Bill C-5 has been approved by the House of Commons and with interests seemingly aligning progressively across various stakeholders. For many of these matters, we anticipate clarity emerging relatively soon, which could lead to share price outperformances for certain stocks. Regulated Utilities: Share price performance to be driven mostly by the macro outlook … “

Mr. Choy has “outperform” ratings on Keyera Corp, Gibson Energy Inc, Brookfield Infrastructure Partners, Enbridge Inc., TransAlta Corp., Pembina Pipeline Corp., Emera Inc., South Bow Corp., TC Energy Corp and AltaGas Ltd.

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I wrote about natural gas again in Wednesday’s newsletter because I’m getting increasingly bullish on the sector.

It looks like Wells Fargo analyst Roger Read agrees, as shown in his Wednesday research report,

“We retain our positive outlook for the US gas macro in general and gassy E&Ps in particular. The slightly cooler 2024/2025 Winter offered insights for how a fundamentally tighter gas market might behave. Steady and significant increases in LNG exports and Power Gen just underway should persist through the end of the decade and sustain favorable fundamentals. This should be positive for gassy E&P returns and support multiple expansion. Our top picks are EQT and RRC. Price Forecast Update. Based on a slightly larger estimated market undersupply in 2025 and 2026, we raise our price decks. Our new/old Henry Hub Gas prices per mmbtu forecast for 2025 and 2026 are $3.87/$3.08 and $4.25/$3.90, respectively. The US gas market has finally shifted from a persistent oversupply to balanced/under supplied”

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Bluesky post of the day:

Diversion: “Cancer-targeting nanoparticles are moving closer to human trials” – M.I.T. Technology Review