Andrew Moffs’ Top Picks for Jan. 30, 2025

Andrew Moffs, senior vice president and portfolio manager at Vision Capital

Focus: real estate stocks

Top Picks: First Capital REIT, Dream Industrial REIT, Sienna Senior Living

MARKET OUTLOOK:

Publicly traded real estate investment trusts (REITs) continue to weather significant volatility, influenced by evolving macroeconomic policy and tepid capital markets. Investors are closely monitoring the long end of the U.S. Treasury curve, often referenced as a proxy for REIT borrowing costs and a benchmark to underwrite property capitalization rates. The 10-year U.S. Treasury bond yield, which is driven by the interplay between key factors including economic growth, inflation expectations, government deficit spending and the prospect of import tariffs on global trade, continues to exacerbate rate volatility that has delayed REITs from closing the gap to its intrinsic values.

Notwithstanding this risk, underlying property fundamentals remain constructive for REITs to rally, underpinned by:

• Higher rates inhibiting the supply of new product, increasing the long-term value of occupied, income-generating real estate and the potential to increase rents.
• Strong balance sheets of publicly traded REITs, benefiting from narrower credit spreads enhancing the cost advantages of unsecured debt facilities stimulating both refinancing and accretive external growth initiatives.
• An inflection point in private real estate valuations, supported by recent transactions offering real-time valuation marks, validating the discounted pricing of select publicly-traded REITs.

Capital markets will play a key role in supporting a REIT recovery. Increased transaction activity in the private market facilitates price discovery, improves investor confidence, and should drive capital inflows into the sector in 2025. Historically, there has been a significant spread in performance dispersion across REITs, offering opportunities for active strategies to generate returns that outpace broader indices.

Today, both Canadian and global-listed REITs offer enhanced diversification and greater embedded value compared to their U.S.-listed counterparts, which are trading closer to their projected net asset values (NAVs).

Overall, in spite of investors’ undue focus on interest rates, publicly traded REITs are well-positioned to generate double-digit total returns through 2025, supported by resilient operating fundamentals, conservative balance sheets and compelling valuations.

• Market-moving news, fast: Get the BNN Bloomberg App now
• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe

TOP PICKS:

First Capital REIT (FCR.UN TSX)

• $3.5 billion market cap, 5.4 per cent distribution yield, $16.45 close.

First Capital REIT (“First Capital” or the “REIT”) owns or manages over 22 million square feet of grocery- anchored, necessity-based retail real estate in Canada’s urban centers, with approximately half of its portfolio located in Toronto. The REIT also has 23 million square feet of potential future development, incremental to the existing retail base. Vision believes this is the highest quality and best-located grocery store-anchored portfolio globally.

Third-quarter 2024 results demonstrated the resilience of its operating portfolio, with same-property net operating income (NOI) increasing by 3.7 per cent and occupancy rising to 96.7 per cent. Lease renewal spreads remained strong at 12.4 per cent, while tenant inducement costs were minimal, paving the way for sustained NOI growth in the years ahead.

The REIT made significant progress on its three-year strategic plan, completing $29 million in property sales, with an incremental pipeline of $236 million in assets identified for disposition. The plan targets over three per cent annual growth in NAV and funds from operations (FFO) per unit while reducing leverage. Having already achieved $700 million of its $1 billion density monetization goal, First Capital is enhancing its balance sheet capacity and unlocking earnings potential through rezoning and development initiatives.

Despite this progress, First Capital’s units trade at a 20 per cent discount to its most recent IFRS valuation. With robust fundamentals, strong growth prospects, and a prime urban property portfolio, Vision anticipates continued outperformance.

Dream Industrial REIT (DIR.UN TSX)

• $3.4 billion market cap, six per cent distribution yield, $11.75 close.

Dream Industrial REIT (“Dream Industrial” or the “REIT”) is a pure-play industrial REIT focusing on small- to-mid-bay (20,000 to 140,000 square foot) urban distribution and logistics assets across Canada (64 per cent of its portfolio) and Europe (36 per cent). Following its $5.9 billion acquisition of Summit Industrial Income REIT in partnership with GIC, the REIT now manages $15 billion in industrial assets, split between wholly owned properties and private partnerships. Trading at the steepest discount to NAV compared to its peers, Dream Industrial offers a compelling opportunity for exposure to the Canadian industrial market, underpinned by strong NOI growth.

While the Canadian industrial sector has experienced slowing rent growth due to increased supply and tariff concerns, Dream Industrial’s focus on small-to-mid-bay properties and high-density urban markets has insulated it from oversupply, which has primarily affected larger facilities in peripheral submarkets. Positive net absorption in key markets like Toronto and Montreal in late 2024, alongside declining vacancy rates, highlights strong fundamentals. Vision expects Dream Industrial’s small bay product operating in high-density markets to deliver faster rent growth compared to its peers.

This growth is augmented by the REIT’s ability to capture significant upside as market rents exceed current in-place rents by 30 per cent. Additionally, its shorter lease durations enable quicker mark-to-market adjustments, enhancing near-term profitability while reducing leverage. Vision projects Dream Industrial’s debt-to- earnings before interest taxes depreciation and amortization (EBITDA) to decrease from 8.5 times to 6.5 times by 2026, further strengthening its financial position. With a resilient portfolio benefiting from strong demand, visible earnings potential, and recent private market transactions offering clarity on the pricing, units of Dream Industrial offer a defensive property portfolio with limited exposure to potential U.S. import tariffs and substantial embedded upside in its current trading valuation.

Sienna Senior Living (SIA TSX)

• $1.3 billion market cap, six per cent distribution yield, $15.57 close.

Sienna Senior Living Inc. (“Sienna” or the “Company”) is a leading owner of 7,000 long-term care homes and 5,000 retirement homes, primarily in Ontario, with additional properties in Saskatchewan, Alberta and British Columbia.

The company benefits from a favorable demand and supply outlook, driving strong performance in its retirement home portfolio. It is expected that growth in the 75 plus age cohort will accelerate to greater than four per cent annually for the next several years. In contrast, new construction starts remaining minimal at less than one to two per cent of inventory due to the high cost of construction. Strong demand growth coupled with low supply growth has led to increasing occupancy rates for seniors’ home landlords. In turn, landlords have been able to drive higher rent growth and net operating income from their properties.

As of October 2024, Sienna’s same-property occupancy reached 90.6 per cent, contributing to 11 per cent year-over- year NOI growth in the third quarter 2024. With a strong demographic backdrop underpinning current forecasting, Sienna is expected to achieve its 95 per cent occupancy target within the next one to two years, enhancing earnings potential.

Additionally, Sienna is leveraging access to cheaper and more diversified sources of capital through CMHC financing and equity offerings to accretive grow its platform externally. In October 2024, the Company announced the acquisition of four newly built continuing care homes in Alberta for $182 million at a 6.5 per cent cap rate, below replacement cost. This acquisition provides immediate scale in Alberta and establishes a platform for further growth through operational efficiencies and economies of scale.

Sienna is also positioned to capitalize on the Ontario government’s extension of the Construction Funding Subsidy top-up, which offers $35 per bed per day for 25 years for approved redevelopment projects.

Leveraging this incentive, Sienna has initiated a new long-term care project in Keswick, Ontario, with an anticipated unlevered return of eight to nine per cent. These developments not only enhance profitability but also reduce portfolio age and maintenance costs.

PAST PICKS: November 30, 2023

Boardwalk REIT (BEI.UN TSX)

• Then: $66.78
• Now: $62.82
• Return: -6%
• Total Return: -4%

Chartwell Retirement Residences (CSH.UN TSX)

• Then: $10.86
• Now: $15.96
• Return: 47%
• Total Return: 53%

First Industrial Realty Trust (FR NYSE)

• Then: US$47.05
• Now: US$53.73
• Return: 14%
• Total Return: 18%

Total Return Average: 22%