2016 REIT outlook - The Globe and Mail

Transcription

Real Estate Investment Trusts Mark Rothschild | Analyst | Canaccord Genuity Corp. (Canada) | mrothschild@canaccordgenuity.com | 1.416.869.7280
Nilanjan Roy, CFA | Associate | Canaccord Genuity Corp. (Canada) | nroy@canaccordgenuity.com | Nick Dukesz, CPA, CA, CFA | Associate | Canaccord Genuity Corp. (Canada) | ndukesz@canaccordgenuity.com | Canadian Equity Research
6 January 2016
Company
Rating
Price
AAR.UN-TSX
Buy
C$4.37
AP.UN-TSX
Hold
C$31.57
AX.UN-TSX
Buy
C$12.80
BAM-NYSE
Buy
US$31.53
BEI.UN-TSX
Hold
C$47.45
BPY-NYSE
Buy
US$23.24
CAR.UN-TSX
Hold
C$26.84
CRR.UN-TSX
Hold
C$12.80
D.UN-TSX
Hold
C$17.37
previous
DIR.UN-TSX
Buy
C$7.18
DRG.UN-TSX
Buy
C$8.66
previous
DRM-TSX
Buy
C$7.27
previous
FCR-TSX
Buy
C$18.35
GRT.UN-TSX
Hold
C$37.96
HOT.UN-TSX
Buy
C$10.65
IIP.UN-TSX
Buy
C$6.56
KMP.UN-TSX
Buy
C$10.51
NWH.UNHold
C$8.93
TSX
previous
REI.UN-TSX
Buy
C$23.69
previous
RUF.U-TSXV
Buy
US$5.13
SOT.UN-TSX
Buy↑
C$7.05
previous
Hold
Share/Unit Price as of 31 December 2015
Target
C$5.25
C$35.50
C$15.50
US$39.00
C$50.00
US$28.00
C$30.00
C$13.00
C$18.50↓
C$20.00
C$9.00
C$9.25↓
C$9.50
C$10.00↓
C$12.00
C$22.00
C$41.00
C$12.50
C$7.50
C$11.50
C$9.15↑
C$8.75
C$27.00↓
C$28.00
US$6.50
C$7.50
Industry Overview
2016 Real Estate Outlook
Strong demand for real estate underpins attractive valuations
For Canadian REITs, 2015 was a volatile year that started off strong and turned negative
through the spring. While many REITs had positive returns, the overall sector was down
4.6%, and REITs with significant exposure to Alberta posted the lowest returns.
Assuming no material change in long-term interest rates or widening of credit spreads,
we expect Canadian REITs to perform well in 2016, and we are forecasting total returns
of, on average, 19%. Of concern to us, the Canadian economy could soften further,
and while interest rates would likely remain low, this could lead to a widening of credit
spreads and lower values for equities.
Overall, there are a number of factors supporting an optimistic outlook for REITs in 2016:
1) The expectation is that long-term interest rates will not rise significantly in Canada; 2)
Based on the current economic and interest-rate environment, we believe that cap rates
are likely to remain close to current levels; 3) The outlook for fundamentals is mixed and
should not be a major factor for most REITs; 4) Canadian REITs are trading at sizable
discounts to NAV and appear attractively valued relative to private market values and
other yield-oriented investments; and, 5) Most REITs are well positioned with healthy
balance sheets and reasonable payout ratios.
REIT sector appears undervalued. Canadian REITs/REOCs under coverage are trading
at a discount to NAV of 13.6% (simple average), the largest discount since the financial
crisis. Historically, REITs have traded, on average, in line with NAV and at a +2.5%
premium to NAV excluding the financial crisis (2008-2009). Should unit prices remain
at current levels, we expect to see unit buybacks increase, and potentially a few REIT
takeovers.
Risks to our outlook. A material increase in the 10-year GoC bond yield or further
widening of credit spreads is the key risk to our outlook. That said, demand for real
estate is quite strong and cap rates are likely to remain firm.
Best investment ideas for 2016. Our best ideas present a mix of value and growth
opportunities, and cross different asset classes. All of our top picks are currently trading
at significant discounts to NAV, which we believe supports unit prices even if internal
growth is weaker than expected. For the most part, our top picks own high-quality and
well-located portfolios and should achieve stronger NOI growth over time. In addition,
should the economy soften further, these portfolios should, for the most part, prove
more defensive.
Our top large cap picks are Brookfield Property Partners L.P. and First Capital Realty
Inc., and our top small-mid cap picks are Dream Industrial REIT, Pure Industrial Real
Estate Trust, and Pure Multi-Family REIT LP.
Target price and rating changes. In conjunction with publishing our 2016 Real Estate
Outlook, we are tweaking target prices for a number of REITs and we are upgrading our
rating for Slate Office REIT to BUY.
Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX | CF. : LSE)
The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all
the companies and securities that are the subject of this report discussed herein.
For important information, please see the Important Disclosures beginning on page 57 of this document.
Real Estate Investment Trusts
Industry Overview
Figure 1: Canadian real estate comp table
Forecast
REIT/REOC
Ticker
Price
Target
31-Dec-15
price
DIVERSIFIED COMMERCIAL
Agellan Commercial REIT*
ACR.un
$8.84
Artis
AX.un
$12.80
Brookfield Property Partners (US$)
BPY
$23.24
CREIT*
REF.un
$42.06
Cominar*
CUF.un
$14.71
Dream Global
DRG.un
$8.66
H&R*
HR.un
$20.05
Melcor REIT*
MR.un
$7.21
Total / Weighted average
Average
INDUSTRIAL
Pure Industrial
AAR.un
$4.37
Dream Industrial
DIR.un
$7.18
Granite
GRT.un
$37.96
Average
OFFICE
Allied Properties
AP.un
$31.57
Dream Office
D.un
$17.37
Slate Office REIT
SOT.un
$7.05
Average
RESIDENTIAL
Boardwalk
BEI.un
$47.45
CAP
CAR.un
$26.84
InterRent
IIP.un
$6.56
Killam
KMP.un
$10.51
Mainstreet*
MEQ
$30.07
Northview Apartment*
NVU.un
$17.56
Pure Multi-Family (US$)
RUF.u
$5.13
Average
RETAIL
SmartREIT*
SRU.un
$30.19
Crombie
CRR.un
$12.80
CT REIT*
CRT.un
$13.00
First Capital
FCR
$18.35
RioCan
REI.un
$23.69
Average
HEALTH CARE/SENIORS
Chartwell*
CSH.un
$12.70
NorthWest Healthcare
NWH.un
$8.93
Average
LODGING
AHIP***
HOT.un
$10.65
InnVest*
INN.un
$5.13
Average
SPECIALTY REAL ESTATE
BAM (US$)
BAM
$31.53
DREAM
DRM
$7.27
Tricon*
TCN
$9.06
**Core Canadian REIT/REOC coverage total / wtd averages
Coverage universe total / wtd averages
Rating
Equity
Annual
total
market
dist/
Current
cap
cap
unit/
(disc)
Diluted AFFO per unit/share
AFFO
AFFO
return
cap ($M)
div
yield
rate
rate
share
to NAV
2015E
2016E
2017E
2016E
2017E
payout
payout
Analyst
Implied
Utilized
NAV per
Prem
AFFO
2016E
multiple
2017E
S
$15.50
$28.00
S
S
$9.25
S
S
S
BUY
BUY
S
S
BUY
S
S
S
29.5%
25.0%
S
S
16.1%
S
S
25.0%
23.5%
$207
$1,770
$16,561
$3,064
$2,497
$975
$5,913
$186
$31,174
$0.78
$1.08
$1.06
$1.80
$1.47
$0.80
$1.35
$0.68
8.8%
8.4%
4.6%
4.3%
10.0%
9.2%
6.7%
9.4%
5.8%
7.7%
S
7.0%
5.9%
S
S
6.6%
S
S
6.0%
6.5%
S
6.50%
5.41%
S
S
6.25%
S
S
5.55%
6.05%
$11.69
$15.43
$28.81
$45.67
$19.19
$9.73
$25.46
$9.10
(24.4%)
(17.1%)
(19.3%)
(7.9%)
(23.4%)
(11.0%)
(21.3%)
(20.8%)
(18.5%)
(18.1%)
$0.93
$1.32
$0.79
$2.60
$1.53
$0.65
$1.62
$0.82
$0.96
$1.30
$0.99
$2.65
$1.51
$0.71
$1.65
$0.82
$1.03
$1.29
$1.12
$2.78
$1.56
$0.78
$1.70
$0.84
9.2x
9.9x
23.4x
15.9x
9.7x
12.3x
12.2x
8.8x
18.1x
12.7x
8.6x
9.9x
20.7x
15.1x
9.4x
11.2x
11.8x
8.6x
16.5x
11.9x
81%
83%
107%
68%
97%
113%
82%
82%
96%
89%
75%
84%
94%
65%
94%
103%
79%
81%
88%
84%
JM
MR
MR
JM
JM
MR
JM
JM
$5.25
$9.00
$41.00
BUY
BUY
HOLD
27.3%
35.1%
14.1%
21.2%
25.5%
$824
$553
$1,785
$3,162
$0.31
$0.70
$2.30
7.1%
9.7%
6.1%
7.0%
7.7%
6.9%
8.1%
9.3%
8.5%
8.1%
6.20%
6.85%
7.75%
7.19%
6.93%
$5.42
$10.78
$47.68
(19.3%)
(33.4%)
(20.4%)
(22.4%)
(24.4%)
$0.35
$0.80
$2.71
$0.38
$0.83
$2.84
$0.39
$0.86
$2.97
11.4x
8.6x
13.4x
12.0x
11.1x
11.1x
8.4x
12.8x
11.6x
10.8x
81%
84%
81%
82%
82%
79%
82%
78%
79%
80%
MR
MR
MR
$35.50
$18.50
$7.50
HOLD
HOLD
BUY
17.2%
15.1%
17.0%
16.3%
16.5%
$2,466
$1,963
$250
$4,679
$1.50
$2.24
$0.75
4.8%
12.9%
10.6%
8.5%
9.4%
6.4%
7.5%
8.4%
6.9%
7.4%
6.25%
6.75%
7.75%
6.54%
6.50%
$32.35
$22.99
$8.61
(2.4%)
(24.4%)
(18.1%)
(12.5%)
(15.0%)
$1.75
$2.41
$0.81
$1.99
$2.23
$0.93
$2.16
$2.18
$0.93
15.9x
7.8x
7.6x
12.1x
10.4x
14.6x
8.0x
7.6x
11.5x
10.1x
76%
101%
81%
86%
86%
70%
103%
80%
84%
84%
MR
MR
MR
$50.00
$30.00
$7.50
$11.50
S
S
$6.50
HOLD
HOLD
BUY
BUY
S
S
BUY
9.7%
16.3%
17.9%
15.1%
S
S
34.0%
14.6%
18.6%
$2,459
$3,209
$466
$657
$310
$916
$252
$8,269
$2.04
$1.22
$0.23
$0.60
$0.00
$1.63
$0.38
4.3%
4.5%
3.5%
5.7%
0.0%
9.3%
7.3%
4.9%
5.0%
6.0%
5.2%
5.3%
6.0%
S
S
6.6%
5.6%
5.8%
5.40%
5.15%
5.25%
5.85%
S
S
6.00%
5.34%
5.53%
$57.28
$27.20
$6.62
$11.39
$49.87
$23.61
$6.14
(17.2%)
(1.3%)
(0.9%)
(7.7%)
(39.7%)
(25.6%)
(16.5%)
(11.1%)
(15.5%)
$3.12
$1.35
$0.29
$0.65
$2.27
$2.07
$0.39
$3.05
$1.46
$0.39
$0.71
$2.33
$2.04
$0.45
$3.08
$1.51
$0.46
$0.75
$2.42
$2.13
$0.47
15.5x
18.4x
16.7x
14.7x
12.9x
8.6x
11.3x
15.6x
14.0x
15.4x
17.8x
14.3x
14.0x
12.4x
8.2x
11.0x
15.1x
13.3x
67%
84%
59%
84%
0%
80%
83%
74%
65%
66%
81%
50%
80%
0%
77%
81%
71%
62%
MR
MR
MR
MR
JM
JM
MR
S
$13.00
S
$22.00
$27.00
S
HOLD
S
BUY
BUY
S
8.5%
S
24.6%
19.9%
19.9%
17.7%
$4,641
$1,678
$2,464
$4,132
$7,606
$20,521
$1.65
$0.89
$0.68
$0.86
$1.41
5.5%
7.0%
5.2%
4.7%
6.0%
5.6%
5.7%
S
6.4%
S
5.8%
6.1%
6.0%
6.1%
S
6.40%
S
5.50%
5.75%
5.75%
5.88%
$30.67
$13.00
$12.15
$19.95
$25.56
(1.6%)
(1.5%)
7.0%
(8.0%)
(7.3%)
(4.0%)
(2.3%)
$1.99
$0.94
$0.81
$0.93
$1.57
$2.07
$0.93
$0.86
$1.00
$1.51
$2.13
$0.95
$0.89
$1.05
$1.51
14.6x
13.8x
15.2x
18.4x
15.7x
15.8x
15.5x
14.2x
13.5x
14.6x
17.5x
15.7x
15.4x
15.1x
80%
96%
80%
86%
94%
87%
87%
77%
94%
76%
82%
93%
85%
85%
JM
MR
JM
MR
MR
S
$9.15
S
HOLD
S
11.4%
11.4%
11.4%
$2,271
$641
$2,912
$0.55
$0.80
4.3%
9.0%
5.4%
6.6%
S
7.6%
7.6%
7.6%
S
7.50%
7.50%
7.50%
$12.88
$9.16
(1.4%)
(2.5%)
(1.7%)
(2.0%)
$0.72
$0.73
$0.78
$0.77
$0.81
$0.81
16.4x
11.6x
15.3x
14.0x
15.6x
11.0x
14.6x
13.3x
71%
104%
78%
87%
68%
99%
75%
83%
JM
MR
$12.50
S
BUY
S
25.8%
S
25.8%
25.8%
$371
$683
$1,053
$0.90
$0.40
8.5%
7.8%
8.0%
8.1%
9.9%
S
9.9%
9.9%
9.15%
S
9.15%
9.15%
$12.39
$5.42
(14.0%)
(5.4%)
(8.4%)
(9.7%)
$1.10
$0.45
$1.32
$0.50
$1.47
$0.54
8.1x
10.2x
9.5x
9.2x
7.2x
9.5x
8.7x
8.3x
68%
80%
76%
74%
61%
74%
69%
67%
MR
JM
$39.00
$10.00
S
BUY
BUY
S
25.2%
37.6%
S
18.7%
22.7%
$31,016
$819
$946
$55,208
$104,550
$0.48
$0.00
$0.24
1.5%
0.0%
2.6%
6.3%
4.5%
NA
NA
NA
6.5%
NA
NA
NA
NA
6.0%
NA
$30.96
$14.33
$13.23
1.9%
(49.3%)
(31.5%)
(10.4%)
(8.7%)
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
14.1x
NA
NA
NA
NA
13.7x
NA
NA
NA
NA
83%
NA
NA
NA
NA
81%
NA
MR
MR
JM
*Canaccord research coverage is currently suspended due to analyst maternity leave. Estimates reflect consensus estimates per FactSet.
**Core Canadian averages exclude BAM, BPY, DRM, and TCN, NA – Not applicable; R- Restricted; S – Under coverage suspension due to analyst maternity leave. MR – Mark Rothschild; JM – Jenny Ma
***US$ estimates converted to C$ utilizing an exchange rate of US$1.00=C$1.38
Source: FactSet, REIT/REOC Reports, Canaccord Genuity Estimates
2
6 January 2016
2
Industry Overview
CANADIAN REAL ESTATE OUTLOOK FOR
2016
For Canadian REITs, 2015 was a volatile year that started off strong and turned
negative through the spring. While many REITs had positive returns, the overall sector
was down 4.6%, and REITs with significant exposure to Alberta posted the lowest
returns.
Assuming no material change in long-term interest rates or widening of credit spreads,
we expect Canadian REITs to perform well in 2016 and we are forecasting total
returns of, on average, 19%. Of concern to us, the Canadian economy could soften
further, and, while interest rates would likely remain low, could lead to a widening of
credit spreads and lower values for equities.
Overall, there are a number of factors supporting an optimistic outlook for REITs in
2016:




The expectation is that long-term interest rates will not rise significantly in
Canada. Economic growth has slowed, inflation is projected to be stable, and we
do not expect that the BoC will be in a position to increase short-term interest
rates in 2016. Therefore, the 10-year GoC bond yield is not expected to rise
significantly in 2016. However, there is a risk that long-term rates rise in Canada
along with U.S. rates, in spite of a lack of economic growth in Canada.
Based on the current economic and interest rate environment, we believe that
cap rates are likely to remain close to current levels. Investor demand for real
estate remained strong through 2015, and we expect this to continue in 2016.
Furthermore, the spread between cap rates and the 10-year GoC bond yield
remains wide at 448 bps. Therefore, even if there is a modest increase in longterm interest rates, we do not expect cap rates to increase significantly in 2016.
The outlook for fundamentals is mixed and should not be a major factor for most
REITs. For the most part, REITs should generate modest internal growth resulting
in cash flow per unit growth, while those REITs with significant exposure to Alberta
will face pressure on their operating performance. In general, though, we do not
believe that fundamentals will be a major factor in how most REIT unit prices
perform in 2016. Rather, reflecting attractive valuations, we expect steady fund
flows into REITs which should drive unit prices higher.
Canadian REITs are trading at sizable discounts to NAV and appear attractively
valued relative to private market values and other yield-oriented investments.
 Premiums/discounts to private market values: price to NAV. Based on our
estimates, Canadian REITs/REOCs under coverage are trading at a discount
to NAV of 13.6% (simple average), the biggest discount since the financial
crisis. Historically, REITs have traded, on average, in line with NAV and at a
+2.5% premium to NAV excluding the financial crisis (2008-2009). Should
unit prices remain at current levels, we expect to see unit buybacks increase,
and potentially a few REIT takeovers.
We believe that all else being equal, REITs should trade at a slight premium to
NAV to account for the diversification, liquidity, and management provided to
real estate investors. However, we do recognize that this gap can also narrow
through increasing cap rates, and not only through higher unit prices.
2
6 January 2016
3
Industry Overview
Figure 2: Historical price to NAV for REITs/REOCs under coverage*
Current NAV Prem / Disc
Historical Average Prem / Disc
Max NAV Premium
Max NAV Discount
40.0%
30.0%
-13.6%
-0.2%
29.5%
-46.2%
Sale of EOP to
Blackstone (peak of
LBO cycle)
20.4%
Mean
reversion
20.0%
12.6%
10.0%
0.0%
-10.0%
-6.3%
-10.2%
-20.0%
-19.3%
-30.0%
Russian debt
crisis/LTCM
debacle
-40.0%
-13.6%
Peak of dotcom
dotcom
bubble
Taper
tantrum
Global credit
crisis
-46.2%
Jun-15
Dec-15
Jun-14
Dec-14
Jun-13
Dec-13
Jun-12
Dec-12
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
Dec-03
Jun-02
Dec-02
Jun-01
Dec-01
Jun-00
Dec-00
Jun-99
Dec-99
Jun-98
Dec-98
Dec-97
-50.0%
*Canaccord research coverage is currently suspended for a number of REITs/REOCs. NAV estimates for those REITs/REOCs used in this figure reflect consensus estimates per FactSet.

Cash flow multiples. Currently, both the commercial and residential
REITs/REOCs under coverage are trading slightly lower than their respective
historical average forward AFFO multiples (Figure 3). While the fear of
widening credit spreads or higher long-term interest rates is likely to remain
on the minds of investors, REITs continue to present an attractive option for
retail investors for both exposure to commercial real estate as well as current
yield.
Figure 3: Weighted average price to forward AFFO multiple for REITs/REOCs under coverage
25.0x
20.9x
20.3x
20.0x
Residential average since
2003, 16.7x
17.5x
17.0x
15.4x
15.0x
13.5x
Commercial average since
2003, 14.2x
10.0x
Commercial
Residential
Commercial average since 2003
Q3/15
Q1/15
Q3/14
Q1/14
Q3/13
Q1/13
Q3/12
Q1/12
Q3/11
Q1/11
Q3/10
Q1/10
Q3/09
Q1/09
Q3/08
Q1/08
Q3/07
Q1/07
Q3/06
Q1/06
Q3/05
Q1/05
Q3/04
Q1/04
Q3/03
Q1/03
5.0x
Residential average since 2003
*Canaccord research coverage is currently suspended for a number of REITs/REOCs. AFFO estimates for those REITs/REOCs used in this figure reflect consensus estimates per FactSet..
3
6 January 2016
4
Industry Overview

Spreads to long-term bond yields: REIT AFFO yields and REIT distribution
yields vs. the 10-year GoC bond yield. The spreads between the 10-year GoC
bond yield and REIT AFFO yields are extremely wide at 584 bps, as depicted
below. As well, the spread between the 10-year GoC bond yield and REIT
distribution yields have widened to 514 bps.
Figure 4: Canadian REIT AFFO yields vs. 10-year GoC bond yield
10.00%
Figure 5: Canadian REIT distribution yields vs. 10-year GoC bond yield
600
10.00%
8.00%
200
Yield (%)
4.00%
400
Spread (bps)
6.00%
6.00%
4.00%
200
2.00%
Spread (bps)
8.00%
400
2.00%
Spread (RHS)
GoC 10-year bond yield (LHS)
Spread (RHS)
REIT AFFO yield (LHS)
Source: Bloomberg, Canaccord Genuity
Q1/15
Q1/14
Q1/13
Q1/12
0
Q1/10
0.00%
Q1/15
Q1/14
Q1/13
Q1/12
Q1/11
0
Q1/10
0.00%
Q1/11
Yield (%)
600
REIT distribution yield (LHS)
Having said that, credit spreads widened in 2015, and real estate values
appear reasonable when compared to corporate bonds. In fact, if credit
spreads were to widen further, there could be some upward pressure on cap
rates.
Figure 6: The spread between cap rates and Canadian BBB bond yields has narrowed
10.0%
Current spread in bps
Average
Max
Min
9.0%
8.0%
400
201
197
345
61
300
6.0%
5.0%
200
4.0%
Spread (bps)
Cap rate / yield
7.0%
3.0%
100
2.0%
1.0%
Spread
National average cap rate (LHS)
Q4/15
Q3/15
Q2/15
Q1/15
Q4/14
Q3/14
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
Q4/10
Q3/10
Q2/10
2009
Q1/10
2008
2007
2006
2005
2004
0
2003
0.0%
Corp BBB yield (LHS)
Source: Bloomberg, CBRE Limited, Canaccord Genuity

Most REITs are well-positioned with healthy balance sheets and reasonable
payout ratios. In general, most Canadian REITs have taken advantage of
favourable debt capital market conditions over the past few years to refinance
debt at lower rates and reduce payout ratios. On a weighted average basis,
REITs/REOCs under coverage are distributing approximately 83% of 2016 AFFO.
This is down from 2014 and 2015, when the AFFO payout ratio for REITs/REOCs
under coverage was 86%. There are six REITs/REOCs under our coverage with
payout ratios below 80%, and all but four REITs/REOCs are below 100%.
4
6 January 2016
5
Industry Overview
Figure 7: Weighted average AFFO payout ratios for REITs/REOCs under coverage*
100%
95%
89%
90%
89%
88%
86%
86%
85%
85%
86%
83%
81%
80%
75%
70%
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
*2015-2017 AFFO payout ratio estimates assume current level of distributions
Source: FactSet, REIT/REOC reports, Canaccord Genuity Estimates
Most REIT management teams have placed an increased emphasis on
maintaining a strong balance sheet. Currently, 15 of the REITs/REOCs under
coverage have leverage under 50%, with leverage ratios ranging from 23% for
Granite REIT to 63% for NorthWest Healthcare Properties REIT.
For 2016, we are forecasting a weighted average total return of 19% from our
coverage universe. On an individual REIT/REOC basis, we are forecasting total
returns ranging from 38% for Dream Unlimited Corp. to 9% for Crombie REIT.
9%
10%
10%
11%
21%
15%
14%
16%
DRG.un
15%
16%
CAR.un
KMP.un
17%
SOT.un
15%
17%
AP.un
D.un
18%
25%
FCR
IIP.un
25%
BPY
20%
19%
25%
BAM
25%
20%
26%
HOT.un
30%
27%
30%
35%
34%
35%
40%
38%
Figure 8: 2016 forecast REIT/REOC total returns to one-year target price
5%
CRR.un
BEI.un
NWH.un
GRT.un
Weighted
Average*
REI.un
Simple
Average
AAR.un
AX.un
RUF.u
DIR.un
DRM
0%
*Weighted average excludes BAM, BPY, and DRM
5
6 January 2016
6
Industry Overview
Modest cash flow growth expected in 2016
Aside from REITs with significant exposure to Alberta, fundamentals are for the most
part stable and should allow for modest cash flow growth. We expect Canadian
REITs/REOCs to post AFFO per unit growth of 3.2% in 2016 and 3.4% in 2017
(weighted average).



Expect modest internal growth from most REITs/REOCs. We expect most REITs to
grow same-property NOI through leasing activity and positive rental spreads on
expiring leases. However, for REITs/REOCs with significant exposure to Western
Canada, fundamentals have softened considerably due to the impact from the
drop in oil and commodity prices. We expect internal growth to be muted for these
REITs/REOCs due to downward pressure on occupancy and rental rates.
Development projects should be accretive. In the current low cap rate
environment, accretive acquisition opportunities are difficult to find. Therefore a
number of REITs have become more active in new development to drive FFO
growth.
Refinancing debt should continue to boost cash flow. Although much of the
interest expense savings from refinancing debt at lower rates has already been
achieved, there are still potential savings from refinancing debt at market rates.
Figure 9: Growth in AFFO per unit/share (weighted average for REITs/REOCs under coverage*)
10.0%
8.6%
8.6%
8.0%
7.0%
5.6%
6.0%
4.0%
3.9%
3.9%
3.2%
3.2%
3.2% 3.2% 3.4%
2.0%
0.1%
0.0%
-2.0%
-2.8%
-4.0%
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15E
'16E
'17E
*Excludes BAM, BPY, DRM, and TCN
**Canaccord research coverage is suspended for a number of REITs/REOCs. AFFO estimates used to calculate the weighted average year-overyear growth rates for those REITs/REOCs reflect consensus estimates per FactSet.
Risks to our 2016 outlook
In our view, there are a handful of risks which could lead to another year of negative
returns from Canadian REITs:

We believe that the most significant reason for the weak unit price performance in
2015 was the expectation that long-term interest rates would rise. Going forward,
the outlook for interest rates remains a concern, and could impact REIT unit
prices materially. To the extent U.S. economic growth drives the U.S. 10-year bond
yield higher, Canadian long-term interest rates could follow, in spite of a lack of
growth in Canada. Conversely, if the Canadian economy softens further, credit
spreads could widen, and even if interest rates remain low, real estate values
would likely decline.
6
6 January 2016
7
Industry Overview
Figure 10: Month-end Canada and U.S. 10-year government bond yields since 1985
14.0%
Correlation
0.97603244
Current spread
-88 bps
Average spread
12.0%
50 bps
Max spread
258 bps
Min spread
-88 bps
10.0%
8.0%
6.0%
4.0%
2.0%
Canada
Jan-15
Jan-13
Jan-14
Jan-12
Jan-10
Jan-11
Jan-08
Jan-09
Jan-06
Jan-07
Jan-04
Jan-05
Jan-03
Jan-01
Jan-02
Jan-99
Jan-00
Jan-97
Jan-98
Jan-95
Jan-96
Jan-94
Jan-92
Jan-93
Jan-90
Jan-91
Jan-88
Jan-89
Jan-86
Jan-87
Jan-85
0.0%
U.S.
Source: Bloomberg, Thomson ONE, Canaccord Genuity

Less material, but also a factor, fundamentals have softened somewhat and the
pace of cash flow growth has declined. We are currently forecasting AFFO per unit
growth of 3.2% for 2016, and 3.4% for 2017. This compares with our January
2015 forecast of 5.5% growth in AFFO per unit for 2016.
With significant office development across Canada, it is possible that
fundamentals will continue to soften. There is new supply being developed in
Calgary, Edmonton, Toronto, and Vancouver, which could lead to increased
vacancy. Although less of a concern, there is also a large amount of industrial and
rental apartment space under development.
Figure 11: Office vacancy rate forecasts for select Canadian markets
20.0%
18.1%
16.7%
16.0%
13.0%
12.0%
12.3%
11.7%
11.0%
9.5%
10.7%
10.7%
8.0%
4.0%
Calgary
Toronto
2014
2015E
Canada
2016E
Source: CBRE Limited, Canaccord Genuity

Consumer debt levels are relatively high and relatedly, the Canadian housing
market has been extremely strong for a number of years in both Toronto and
7
6 January 2016
8
Industry Overview

Vancouver. A correction in housing prices, possibly as a result of an increase in
the five-year GoC bond yield, could negatively affect the Canadian economy.
Should the price of oil remain low for an extended period of time, the Canadian
economy could suffer. Specifically, those REITs with exposure to Alberta could
face additional pressure.
Changes to target prices
In conjunction with publishing our 2016 Real Estate Outlook, we are making several
changes to our target prices:





We are lowering our target price slightly for Dream Global REIT to C$9.25 (from
C$9.50), which equates to a 5% discount to NAV. The new target price, combined
with an annualized distribution per unit of $0.80, equates to a forecast total
return of 16%. While we expect the fundamental performance of the REIT’s assets
to be solid in 2016, we do not believe that the unit price will reach NAV in the
near-term.
We are reducing our target price for Dream Office REIT to C$18.50 (from
C$20.00), which equates to a 20% discount to NAV. The outlook for the Alberta
office market continues to weaken, and it is difficult to see a catalyst in the near
term. Additionally, with NOI poised to decline in 2016, and the increase in capex,
the likelihood of a distribution cut has increased materially.
We are lowering our target price for RioCan REIT to C$27.00 (from C$28.00),
which equates to a 5% premium to NAV. The new target price, combined with an
annualized distribution per unit of $1.41, equates to a forecast total return of
20%.
For NorthWest Healthcare Properties REIT, we are raising our target price to
C$9.15 (from C$8.75), which is in line with our NAV estimate. The new target
price, combined with an annualized distribution per unit of $0.80, equates to a
forecast total return of 11%.
Reflecting the softer housing market in both Saskatchewan and Alberta, we are
lowering our target price for Dream Unlimited Corp. to C$10.00 (from C$12.00).
Though cash flow should rise in 2016 from condo completions in Toronto,
investors are likely to remain cautious until there are some signs of improvement
in Western Canada housing.
Upgrading Slate Office REIT to a BUY
While suburban office fundamentals have softened, Slate Office REIT should grow
cash flow in 2016 as a result of acquisitions in 2015. In addition, the attractive 10.6%
current yield is fully covered by cash flow. The REIT’s units are currently trading at an
18% discount to NAV and only 7.6x our 2016 AFFO estimate, the lowest in our
coverage universe. While fundamentals have softened slightly and leverage is
relatively high, the REIT’s units provide solid value and we are therefore upgrading our
rating for Slate Office REIT from HOLD to BUY.
8
6 January 2016
9
Industry Overview
Figure 12: Changes to target prices and ratings
Price
REIT/REOC
31-Dec-15
Target
Price
Rating
Old
Current
Old
Current
Pre-tax
Prem
Annual
Forecast
AFFO
Target AFFO
NAV per
(disc)
dividend/
total
multiple
multiple
unit/share
to NAV
distribution
return
2017E
2017E
ACR.un*
$8.84
BUY
S
S
$11.69
-24%
$0.78
S
8.6x
S
AX.un
$12.80
BUY
BUY
$15.50
$15.43
-17%
$1.08
30%
9.9x
12.0x
BPY (US$)
$23.24
BUY
BUY
$28.00
$28.81
-19%
$1.06
25%
20.7x
24.9x
REF.un*
$42.06
HOLD
S
S
$45.67
-8%
$1.80
S
15.1x
S
CUF.un*
$14.71
HOLD
S
S
$19.19
-23%
$1.47
S
9.4x
S
DRG.un
$8.66
BUY
BUY
$9.25
$9.73
-11%
$0.80
16%
11.2x
11.9x
HR.un*
$20.05
HOLD
S
S
$25.46
-21%
$1.35
S
11.8x
S
MR.un*
$7.21
S
S
$9.10
-21%
$0.68
S
8.6x
S
$9.50
INDUSTRIAL
AAR.un
$4.37
BUY
BUY
$5.25
$5.42
-19%
$0.31
27%
11.1x
13.3x
DIR.un
$7.18
BUY
BUY
$9.00
$10.78
-33%
$0.70
35%
8.4x
10.5x
GRT.un
$37.96
HOLD
HOLD
$41.00
$47.68
-20%
$2.30
14%
12.8x
13.8x
AP.un
$31.57
HOLD
HOLD
$35.50
$32.35
-2%
$1.50
17%
14.6x
16.5x
D.un***
$17.37
HOLD
HOLD
$18.50
$22.99
-24%
$2.24
15%
8.0x
8.5x
$7.05
HOLD
BUY
$7.50
$8.61
-18%
$0.75
17%
7.6x
8.0x
OFFICE
SOT.un
$20.00
RESIDENTIAL
BEI.un
$47.45
HOLD
HOLD t
$50.00
$57.28
-17%
$2.04
10%
15.4x
16.2x
CAR.un
$26.84
HOLD
HOLD
$30.00
$27.20
-1%
$1.22
16%
17.8x
19.9x
$6.56
BUY
BUY
$7.50
$6.62
-1%
$0.23
18%
14.3x
16.3x
KMP.un
$10.51
HOLD
BUY
$11.50
$11.39
-8%
$0.60
15%
14.0x
15.4x
MEQ*
$30.07
BUY
S
S
$49.87
-40%
$0.00
S
12.4x
S
NVU.un*
$17.56
HOLD
S
S
$23.61
-26%
$1.63
S
8.2x
S
$5.13
BUY
BUY
$6.50
$6.14
-16%
$0.38
34%
11.0x
14.0x
SRU.un*
$30.19
HOLD
S
S
$30.67
-2%
$1.65
S
14.2x
S
CRR.un
$12.80
BUY
HOLD
$13.00
$13.00
-2%
$0.89
9%
13.5x
13.7x
CRT.un*
$13.00
HOLD
S
S
$12.15
7%
$0.68
S
14.6x
S
FCR
$18.35
HOLD
BUY
$22.00
$19.95
-8%
$0.86
25%
17.5x
21.0x
REI.un
$23.69
HOLD
BUY
$28.00
$27.00
$25.56
-7%
$1.41
20%
15.7x
17.9x
S
$12.88
-1%
$0.55
S
15.6x
S
$8.75
$9.15
$9.16
-2%
$0.80
11%
11.0x
11.3x
IIP.un
RUF.u (US$)
RETAIL
HEALTH CARE/SENIORS
CSH.un*
$12.70
NWH.un
$8.93
HOLD
S
HOLD
LODGING
HOT.un**
INN.un*
$10.65
BUY
BUY
$12.50
$12.39
-14%
$0.90
26%
7.2x
8.5x
$5.13
HOLD
S
S
$5.42
-5%
$0.40
S
9.5x
S
$39.00
$30.96
2%
$0.48
25%
NA
NA
$10.00
$14.33
-49%
$0.00
38%
NA
NA
S
$13.23
-32%
$0.24
S
NA
NA
$31.53
BUY
BUY
DRM
$7.27
BUY
BUY
TCN*
$9.06
BUY
S
BAM (US$)
$12.00
*Canaccord research coverage is currently suspended. Estimates reflect consensus estimates per FactSet.
**US$ estimates converted to C$ utilizing an exchange rate of US$1.00=C$1.38
***Forecast total return for D.un assumes a distribution per unit cut to $1.50 (from $2.24)
9
6 January 2016
10
Industry Overview
BEST INVESTMENT IDEAS FOR 2016
For 2016, our best ideas present a mix of value and growth opportunities and cross
different asset classes. All of our top picks are currently trading at significant
discounts to NAV, which we believe supports unit prices even if internal growth is
weaker than expected. For the most part, our top picks own high quality and welllocated portfolios and should achieve stronger NOI growth over time. In addition,
should the economy soften further, these portfolios should, for the most part, prove
more defensive.
Large caps

Brookfield Property Partners L.P.

First Capital Realty Inc.
Small-to-mid caps

Dream Industrial REIT

Pure Industrial Real Estate Trust

Pure Multi-Family REIT LP
Our investment thesis for each of our top picks is provided below
Large caps
Brookfield Property Partners L.P. (BPY : NYSE | US$23.24 | BUY, Target price
US$28.00)
Brookfield Property Partners L.P. (BPY) is a globally diversified company that owns and
operates high-quality office and retail assets (mostly through its 34% interest in
General Growth Properties (GGP : NYSE | Not Rated)), in addition to industrial and
multi-family assets. The portfolio is diversified across the U.S., Canada, Australia, and
the United Kingdom. BPY is externally managed by Brookfield Asset Management Inc.
Potential for significant NAV growth. We believe that there is potential for significant
cash flow and NAV per unit growth as new leases take effect and active development
and redevelopment projects are completed. In particular, we expect cash flow to
increase in the near term as tenants taking occupancy in Lower Manhattan begin
paying rent. Longer term, NAV per unit growth should come from: 1) increasing
occupancy; 2) marking expiring leases to market rents; and 3) completion of active
development and redevelopment projects.
Valuation and recommendation. Our US$28.00 target price is just below our NAV per
unit estimate of US$28.81. While we expect NAV to rise dramatically over the coming
years, the external management contract, along with BPY’s partnership structure, are
liabilities to many investors. BPY’s units currently trade at a 19.3% discount to NAV,
and combined with an annualized distribution of US$1.06 per unit, the forecast total
return is 25.0%.
First Capital Realty Inc. (FCR : TSX | C$18.35 | BUY, Target price C$22.00)
First Capital Realty Inc. (FCR) owns a high-quality portfolio of grocery-anchored
shopping centres located in major Canadian markets, with specific exposure to
Toronto (36% of fair value), Montreal (15%), Calgary (12%), and Vancouver (12%).
Expect sector-leading internal growth. Despite the challenging retail operating
environment, we expect FCR’s portfolio to perform well. The company’s portfolio is
10
6 January 2016
11
Industry Overview
extremely well-located and is expected to maintain occupancy with increasing rental
rates.
Development pipeline should lead to cash flow per share growth. FCR has several
sizable development projects which are scheduled to be completed over the next few
years and should boost FFO per share significantly. Additionally, we expect the recent
change in management to lead to an increased focus on capital management and
FFO per share growth, which should lead to a higher multiple over time.
Valuation and recommendation. We utilize a cap rate of 5.50% to value FCR’s
portfolio, resulting in a NAV per share estimate of $19.95. Our target price of C$22.00
equates to a 10% premium to our NAV estimate and, combined with an annualized
dividend of $0.86 per share (4.7% current yield), equates to a 12-month forecast total
return of 24.6%.
SMALL-TO-MID CAPS
Dream Industrial REIT (DIR.un : TSX | C$7.18 | BUY, Target price C$9.00)
Dream Industrial REIT owns a portfolio of predominantly small-bay industrial
properties totaling 16.9 million sf located in primary and secondary markets across
Canada.
Healthy fundamentals should support modest NOI growth. Industrial fundamentals
remain healthy in most Canadian markets and we expect the REIT to maintain
occupancy while achieving modest rental rate increases on renewals, leading to
steady internal growth.
Attractive yield is fully covered by cash flow. Dream Industrial’s annualized distribution
of $0.70 per unit equates to a 9.7% current yield. Considering that the current payout
ratio is 84% (based on our 2016 AFFO estimate), we view this yield as extremely
attractive, especially when compared to corporate bonds.
Units are extremely undervalued. We utilize a 6.85% cap rate to value Dream
Industrial’s portfolio, resulting in a NAV per unit estimate of $10.78. The REIT’s units
currently trade at a dramatic 33.4% discount to NAV, or an implied cap rate of 8.1%.
In the near term, we expect the unit price to lag as investors are placing a discount on
externally managed REITs, and management has yet to take any action to narrow this
discount. However, we do not believe that this discount will persist through 2016
without some action taken. Our target price of C$9.00 is based on a ~15% discount to
NAV, and combined with the annualized distribution, equates to a 12-month forecast
total return of 35.1%.
Pure Industrial Real Estate Trust (AAR.UN : TSX | C$4.37 | BUY, Target price C$5.25)
Pure Industrial Real Estate Trust owns a portfolio of industrial properties comprising
17.4 million sf of GLA. The REIT’s properties are predominantly located in major
Canadian cities (Calgary, Edmonton, Toronto, and Vancouver) and include a portfolio
of FedEx properties in the U.S. (12% of GLA).
Investment highlights. With its high-quality portfolio, Pure Industrial is poised to
benefit from healthy industrial property fundamentals. Led by a strong and focused
management team, we expect steady, albeit modest, internal growth for the next few
years, which should lead to multiple expansion. The REIT entered the U.S. in 2014
through the acquisition of a portfolio of properties fully leased to FedEx. We expect the
REIT to continue growing in the U.S., although management has indicated that its U.S.
exposure should remain below 20%.
11
6 January 2016
12
Industry Overview
The REIT’s Vaughan and New Jersey FedEx developments are now substantially
complete and should be income-producing in Q2/16, which should provide a boost to
cash flow. Further supporting growth, in order to leverage its platform and increase
the return on its properties, Pure Industrial has entered into a joint venture with a
Canadian institution which will allow it to earn fees on its properties while growing its
portfolio.
Valuation and recommendation. We utilize a 6.20% cap rate to value Pure Industrial’s
portfolio, resulting in a NAV per unit estimate of $5.42. Pure Industrial’s units are
currently trading at an implied cap rate of 6.9%, or a 19.3% discount to NAV. We
expect management to continue to focus on improving the REIT’s valuation through
divesting non-core assets and repurchasing units. We believe that a stronger pace of
internal growth will be crucial for the REIT to be awarded a premium valuation.
Combined with an annualized distribution of $0.31 per unit (7.1% current yield), our
target price implies a 12-month forecast total return of 27.3%.
Pure Multi-Family REIT LP (RUF.U : TSX-V | US$5.13 | BUY, Target price US$6.50)
Pure Multi-Family REIT LP owns a portfolio of high quality rental apartment properties
located mostly in Dallas-Fort Worth and other large cities in Texas and Arizona.
Strong fundamentals should drive internal growth. Fundamentals in the REIT’s core
markets are strong and we expect robust same-property NOI growth over the next few
years.
High-grading the portfolio. The REIT continues to execute on its strategy of growing the
portfolio while upgrading the quality of its assets. This is being conducted through
disposing older, class B properties in order to partly finance the acquisition of newer,
class A properties. While this results in some near-term dilution, higher quality
properties should maintain occupancy and produce stronger NOI growth over time.
Valuation and recommendation. We utilize a 6.00% cap rate to value Pure MultiFamily’s portfolio, resulting in a NAV per unit of US$6.14. The REIT is currently trading
at an implied cap rate of 6.6%, or a 16.5% discount to NAV. On a cash flow multiples
basis, the REIT trades in line with Milestone Apartments REIT, although below most of
its Canadian peers. We expect the REIT’s relative valuation to improve as investors
realize the superior growth profile of Pure Multi-Family’s portfolio.
Combined with an annualized distribution of US$0.38 per unit (7.3% current yield),
our target price implies a 12-month forecast total return of 34.0%.
12
6 January 2016
13
Industry Overview
2015 IN REVIEW
Canadian REITs returned -4.6% in 2015
For Canadian REITs, 2015 was a volatile year that started off strong and turned
negative through the spring. A weak December capped off an overall poor
performance from REITs for the year, and some REITs were down significantly. That
said, most of the worst-performing REITs had significant exposure to Alberta, and
excluding those REITs, we believe that the total return from the REIT sector was flat to
slightly positive.
Notwithstanding the weak performance, demand for direct property remained strong,
although fundamentals softened in some markets, Alberta in particular. For 2015,
Canadian REITs, as represented by the S&P/TSX Capped REIT Index, returned -4.6%.
Some of the major factors that impacted the sector were:






Long-term interest rates in Canada declined in 2015, but were volatile for most of
the year. The 10-year GoC bond yield declined 43 bps in Q1/15 from 1.79% on
December 31, 2014, to 1.36% on March 31, 2015. Since then, the yield was as
high as 1.91% in June; however, it declined over the latter half of the year and
settled at 1.39% at year-end, down 40 bps from the beginning of the year.
This was in contrast to the U.S. 10-year bond yield which was more stable and
over the course of 2015 increased 10 bps to 2.27%, as economic growth has
picked up in the U.S. Historically, the Canadian and U.S. 10-year bond yields have
tracked each other closely; however, the yields have exhibited some divergence
over the last few years.
Credit spreads rose steadily over the second half of 2015, and the spread
between Canadian cap rates and BBB corporate yields shrunk as a result. At
March 31, 2015, the spread was relatively wide at 280 bps. However, the spread
narrowed over the course of 2015 and was 201 bps at December 31, 2015,
essentially in line with the 10-year average. We believe that widening credit
spreads justify some of the weakness in the REIT market.
Oil prices continued to decline throughout 2015 and as a result the Canadian
economy was negatively impacted. According to the Bank of Canada, business
investment in the energy sector declined approximately 40% in 2015 and GDP
growth was negative in the first two quarters of 2015. Clearly, the weak
performance from Canadian REITs was partially driven by weaker fundamentals.
Office fundamentals weakened and the national vacancy rate increased from
10.7% at Q4/14 to 11.8% at Q3/15. In Alberta, the softening was most
significant. The Calgary office vacancy rate increased from 11.0% at Q4/14 to
15.5% at Q3/15, and in Edmonton from 11.3% at Q4/14 to 12.1% at Q3/15.
Store closures and the departure of Target drove vacancy higher for some retail
REITs and were the key topic of discussion in the retail sector in 2015. Internal
growth was negative for some retail REITs and is likely to remain negative in
2016.
Equity markets in general performed poorly, with the S&P/TSX Composite Index
posting a -8.3% return in 2015, below the -4.6% return from Canadian REITs.
13
6 January 2016
14
Industry Overview
Figure 13: The S&P/TSX Capped REIT Index returned -4.6% in 2015
55.3%
60.0%
40.0%
25.9%
25.3% 24.7%
22.6% 21.7%
17.0%
14.0%
20.0%
10.4%
7.4%
0.0%
-4.6%
-5.5%
-5.7%
-20.0%
-40.0%
-38.3%
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-60.0%
Long-term interest rates were volatile in 2015
The 10-year GoC bond yield declined 40 bps over the course of 2015; however, there
were some periods of volatility during the year. In Q1/15, long-term interest rates
declined and Canadian REITs performed well, returning +8.0% and outperforming the
S&P/TSX Composite which returned +2.6%. However, the 10-year GoC bond yield rose
33 bps during Q2/15, and consequently Canadian REITs returned -5.0% during the
quarter.
In the latter half of the year, long-term yields fell 42 bps to bottom out at 1.26% in
August 2015 before settling at 1.39% at December 31, 2015. Notwithstanding the
declining 10-year bond yield, the Canadian REIT index retreated 7.0% in the second
half of 2015 as the magnitude of the economic slowdown due to the decline in oil
prices became more evident. Additionally, concerns of a rise in long-term interest
rates due to the impending rate hike by the U.S. Federal Reserve weighed on the
Canadian real estate sector.
14
6 January 2016
15
Industry Overview
Figure 14: S&P/TSX Capped REIT Index – 2015 performance
GoC 10-year bond yield (RHS)
Dec-15
Nov-15
Oct-15
1.2%
Sep-15
-12.0%
Aug-15
1.4%
Jul-15
-6.0%
Jun-15
1.6%
May-15
0.0%
Apr-15
1.8%
Mar-15
6.0%
Feb-15
2.0%
Jan-15
12.0%
S&P/TSX Capped REIT Index (LHS)
S&P/TSX Composite Index (LHS)
During 2015, Canadian REITs lagged other yield-oriented equity investments. The REIT
Index’s -4.6% total return underperformed the S&P/TSX Capped Utilities Index (-2.7%),
S&P/TSX Capped Financials Index (-3.0%), and S&P/TSX Capped Telecommunications
Services Index (+6.0%).
Figure 15: 2015 total returns for Canadian REITs, other yield-oriented sectors, and the broad market
10.0%
6.0%
5.0%
2.5%
0.0%
-5.0%
-3.0%
-2.7%
S&P/TSX Capped
Financials Index
S&P/TSX Capped
Utilities Index
-4.6%
-8.3%
-10.0%
S&P/TSX Composite S&P/TSX Capped REIT
Index
Index
MSCI U.S. REIT Index
S&P/TSX Capped
Telecommunications
Services Index
In 2015, Canadian underperformed both U.S. REITS and the Global REIT Index
While the U.S. economy continued to strengthen, concerns of a rise in long-term
interest rates weighed on U.S. REITs in 2015. However, the MSCI U.S. REIT Index
outperformed Canadian REITs and returned a modest +2.5% for 2015. Meanwhile,
the Asian REIT index declined 7.2% whereas the European REIT index increased 4.2%.
The Global REIT index posted a total return of -0.4%.
15
6 January 2016
16
Industry Overview
Figure 16: 2015 total returns for global REIT indices
5.0%
4.2%
2.5%
2.5%
0.0%
-0.4%
-2.5%
-5.0%
-7.5%
-4.6%
-7.2%
-10.0%
NAREIT Asia REIT S&P/TSX Capped
Index
REIT Index
NAREIT Global
REIT Index
MSCI U.S. REIT
Index
NAREIT Europe
REIT Index
Best and worst performing REITs in 2015
During 2015, the best performing Canadian REIT/REOC in our coverage was Amica
Mature Lifestyles Inc., which delivered a total return of +176% as a result of its
acquisition by BayBridge Seniors Housing Corp.
In 2015, 18 REITs/REOCs within our coverage universe (of 34) posted positive total
returns, with Amica Mature Lifestyles Inc. (+176% total return), SmartREIT (+17%),
and Pure Multi-Family REIT LP (+16%) being the top performers.
The strong performance from Amica Mature Lifestyles Inc. was driven by its
acquisition by Baybridge Seniors Housing Corp. at a 113% premium to Amica’s
share price.

Pure Multi-Family REIT LP has posted strong internal growth with same-property
NOI increasing 8.5% in the first three quarters of 2015. Fundamentals in the
REIT’s core Texas markets remain strong and cash flow growth is expected to
continue.

SmartREIT has posted healthy cash flow growth, partially due to the accretive
SmartCentres acquisition in Q2/15 which increased leverage. As well, despite a
challenging environment for retail landlords, SmartREIT maintained high
occupancy.
The worst performing REIT/REOCs in our coverage were Dream Unlimited Corp. (25%), Dream Office REIT (-24%), and Mainstreet Equity Corp. (-21%) as all three have
significant exposure to Alberta and investors became concerned about the impact of
softening fundamentals on cash flow and asset values. In fact, the six worstperforming REITs/REOCs in 2015 all had significant exposure to Alberta or other
energy-focused regions such as Saskatchewan and the Territories.

16
6 January 2016
17
Industry Overview
Figure 17: 2015 total returns for REITs/REOCs under coverage*
20%
17%
16% 16%
13%
12% 12% 11% 11%
10%
10% 8%
6% 6% 6%
5% 5%
3% 3%
0%
-2% -2% -3%
-10%
-4% -4% -5%
-6%
-7% -8%
-12%
-14%
-17%
-18%-20%
-21%
-24% -25%
-20%
D.un
DRM
MEQ**
NVU.un**
BEI.un
MR.un**
AP.un
CUF.un**
DIR.un
INN.un**
REI.un
S&P/TSX Capped REIT Index
BAM
REF.un**
AX.un
GRT.un
SOT.un
HR.un**
FCR
AAR.un
CRR.un
NWH.un
BPY
TCN**
DRG.un
KMP.un
CRT.un**
ACR.un**
CAR.un
CSH.un**
IIP.un
HOT.un
RUF.u
SRU.un**
-30%
*Excludes Amica Mature Lifestyle Inc. which returned +176%
**Canaccord research coverage is currently suspended
Source: FactSet, Canaccord Genuity
17
6 January 2016
18
Industry Overview
OUR OUTLOOK FOR 2016
We expect Canadian REITs to perform well in 2016 and we are forecasting total
returns of, on average, 19%. That said, we are concerned about widening credit
spreads, and recognize that an increase in long-term interest rates would be negative
for the sector.
There are a number of factors supporting our optimistic outlook for the REIT sector:
The expectation is that long-term interest rates will not rise significantly in
Canada;
Based on the current economic and interest-rate environment, we believe that
cap rates are likely to remain close to current levels;
The outlook for fundamentals is mixed and should not be a major factor for most
REITs;
Canadian REITs are trading at sizable discounts to NAV and appear attractively
valued relative to private market values and other yield-oriented investments; and,
Most REITs are well-positioned with healthy balance sheets and reasonable
payout ratios.





THE EXPECTATION IS THAT LONG-TERM INTEREST RATES WILL NOT RISE
SIGNIFICANTLY IN CANADA
During 2015, long-term bond yields dropped as economic growth slowed in Canada.
At year-end, the 10-year GoC bond yield was 1.39%, 40 bps below the 2014 year-end
bond yield of 1.79%.
Figure 18: In 2015, the 10-year GoC bond yield declined by 40 bps
2.80%
24%
2014
2015
18%
2.40%
12%
2.00%
6%
1.60%
0%
1.20%
10-yr GoC bond yield (LHS)
Dec-15
Oct-15
Nov-15
Sep-15
Jul-15
Aug-15
Jun-15
Apr-15
May-15
Feb-15
Mar-15
Jan-15
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Jan-14
Feb-14
Mar-14
-6%
S&P/TSX Capped REIT Index (RHS)
In the U.S., both economic output and employment growth have been healthy and the
U.S. Federal Reserve raised its key interest rate by 25 bps in December 2015 with
further hikes likely in 2016. As the move to raise rates was widely anticipated, longterm bond yields increased modestly in 2015, with the U.S. 10-year bond yield rising
10 bps to 2.27% at the end of the year. According to Bloomberg, economists are
predicting that the 10-year bond yield will increase by approximately 60 bps in Canada
and 50 bps in the U.S. in 2016, to a median forecast of 2.8% for the U.S. 10-year and
2.0% for the Canada 10-year (Figure 19).
18
6 January 2016
19
Industry Overview
Figure 19: Canada and U.S. 10-year bond yields (2004 – 2016F)
7.0%
6.0%
5.0%
4.0%
3.0%
2.8%
2.0%
2.0%
Canada
2016F
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1.0%
U.S.
In Canada, however, the economic outlook is more uncertain. Most economic
indicators point to long-term interest rates remaining relatively stable:

The slowdown in the energy sector resulted in GDP contracting modestly in the
first two quarters of 2015. Since then, there has been a pickup in economic
growth, and the BoC expects 1.1% growth in real GDP for the full-year 2015. For
2016, the BoC expects real GDP growth of +2.0%, below forecast real GDP growth
in the U.S. of +2.6% in 2016.
Figure 20: GDP growth forecasts for Canada and the United States
4.0%
3.0%
2.6%
2.5%
2.4% 2.4%
2.5% 2.5%
2.0%
2.0%
1.1%
1.0%
0.0%
2014
2015F
Canada
2016F
2017F
United States
Source: Bank of Canada, Canaccord Genuity

Inflation, as measured by core CPI, has been stable and according to the BoC is
expected to remain close to 2.0% for 2016 and 2017 (see Figure 21), which is
well within the BoC’s targeted 1-3% range. According to the BoC, a “significant
portion” of the measured inflation in 2015 was due to the depreciation of the
Canadian dollar which resulted in increased prices for imported goods.
19
6 January 2016
20
Industry Overview
Figure 21: Canadian inflation as measured by total and core CPI
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
Core CPI
2017F
2016F
2015F
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
-2.0%
Total CPI
Source: Bank of Canada, Canaccord Genuity
Essentially, economic growth has slowed, inflation is projected to be stable, and we do
not expect that the BoC will be in a position increase short-term interest rates in
2016. Therefore, the 10-year GoC bond yield is not expected to rise significantly in
2016.
That said, U.S. and Canadian long-term bond yields have historically been highly
correlated and it is likely that an increase in long-term yields in the U.S. will lead to a
corresponding rise in Canadian long-term yields. However, given the significant
divergence in the economic outlooks for the two countries, it appears reasonable to
expect that long-term interest rates in Canada will remain relatively low.
BASED ON THE CURRENT ECONOMIC AND INTEREST RATE ENVIRONMENT, WE
BELIEVE THAT CAP RATES ARE LIKELY TO REMAIN CLOSE TO CURRENT LEVELS
Investor demand for real estate remained strong through 2015, and we see this
continuing in 2016. Furthermore, the spread between cap rates and the 10-year GoC
bond yield is wide. Therefore, even if there is a modest increase in long-term interest
rates, we do not expect cap rates to increase significantly in 2016.
While REIT unit prices slumped in 2015 in part due to concerns over rising interest
rates, private market demand for real estate was strong. According to CBRE, the
national average cap rate in Canada dropped 11 bps in 2015 to 5.88% at Q4/15 as
investor appetite for high-quality assets remained strong. A few notable portfolio
transactions in 2015 were:



Regal Lifestyle Communities Inc., a seniors housing operator, was acquired by
Health Care REIT, Inc. and Revera Inc. for $764 million at a 6.1% cap rate.
CAP REIT acquired a portfolio of 16 apartment properties located in Montreal for
$502 million at a cap rate of 4.5%. The portfolio consisted of 3,661 suites and
194,000 sf of commercial space.
Boardwalk REIT sold its Windsor portfolio to a private REIT for $136 million at a
cap rate of 5.4%. The portfolio consisted of high-rise and low-rise apartment
complexes and townhouses totaling 1,685 units.
20
6 January 2016
21
Industry Overview
Brookfield Canada Office Properties sold the HSBC building located at 70 York
Street in downtown Toronto to Anbang Insurance, a Chinese insurance company,
for $110 million at a cap rate of ~4.3%.
Real estate continues to gain popularity among institutional asset managers, which
puts downward pressure on cap rates. In our view, this is in part due to the attractive
and stable yields generated by real estate in a continued low interest rate
environment. Going forward, with long-term interest rates expected to remain low and
fundamentals supporting NOI growth for most property types, demand for quality
properties should remain strong, and cap rates are unlikely to rise.

Spread between cap rates and GoC bond yield remains close to all-time high
Although cap rates have steadily compressed over the last several years, long-term
interest rates have dropped at a more rapid pace, which has widened the spread
between cap rates and long-term bond yields. Currently, the national average cap rate
(excluding hotels) is 5.88% whereas the yield on the 10-year GoC bond is 1.39%,
equating to a spread of 448 bps.
Figure 22: Spread between national average cap rate and long-term bond yield
Average
Max
Min
12.0%
11.0%
10.0%
448
327
459
(104)
550
450
9.0%
350
7.0%
250
6.0%
5.0%
150
4.0%
Spread in bps
Cap rate / yield
8.0%
50
3.0%
2.0%
(50)
1.0%
0.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Q1/10
Q2/10
Q3/10
Q4/10
Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
Q3/14
Q4/14
Q1/15
Q2/15
Q3/15
Q4/15
(150)
Spread (RHS)
10-year GoC yield (LHS)
However, the spread is somewhat less attractive when considering credit spreads. In
fact, credit spreads rose in 2015, and the spread between cap rates and BBB
corporate yields narrowed. At March 31, 2015, the spread was relatively wide at 280
bps, suggesting that if long-term interest rates rose modestly, cap rates would have a
wide cushion. However, as credit spreads widened through 2015, the spread
narrowed, and was 201 bps at December 31, 2015, essentially in line with the 10year average. Therefore, there could be upward pressure on cap rates if long-term
interest rates (or credit spreads) rise significantly.
21
6 January 2016
22
Industry Overview
Figure 23: The spread between cap rates and Canadian BBB bond yields has narrowed
10.0%
Average
Max
Min
9.0%
8.0%
400
201
197
345
61
300
6.0%
5.0%
200
4.0%
Spread (bps)
Cap rate / yield
7.0%
3.0%
100
2.0%
1.0%
0.0%
Q4/15
Q2/15
Q3/15
Q4/14
Q1/15
Q2/14
Q3/14
Q4/13
Q1/14
Q2/13
Q3/13
Q4/12
Q1/13
Q2/12
Q3/12
Q4/11
Q1/12
Q2/11
Q3/11
Q4/10
Spread (RHS)
Q1/11
Q2/10
Q3/10
2009
Q1/10
2007
2008
2005
2006
2003
2004
0
Corp BBB yield (LHS)
Healthy demand for quality real estate supports current real estate values
Demand for real estate investment has remained strong and cap rates continue to
compress, with the national average cap rate declining 11 bps over the first three
quarters of 2015. Assuming no material spike in long-term interest rates or widening
of credit spreads, we expect cap rates to hold steady in 2016.
Figure 24: Cap rates in major CMAs (2008 – 2015)
8.5%
8.0%
Cap rate
7.5%
7.0%
6.5%
6.0%
5.5%
Calgary
Edmonton
Toronto
Vancouver
Montreal
Q3/15
Q1/15
Q3/14
Q1/14
Q3/13
Q1/13
Q3/12
Q1/12
Q3/11
Q1/11
Q3/10
Q1/10
Q3/09
Q1/09
Q3/08
5.0%
National avg.
THE OUTLOOK FOR FUNDAMENTALS IS MIXED AND SHOULD NOT BE A MAJOR
FACTOR FOR MOST REITS
For the most part, REITs should generate modest internal growth resulting in cash flow
per unit growth, while those REITs with significant exposure to Alberta will face
pressure on their operating performance. In general though, we do not believe that
fundamentals will be a major factor in how most REIT unit prices perform in 2016.
Rather, reflecting attractive valuations, we expect steady fund flows into REITs which
should drive unit prices higher.

Office fundamentals have softened with the national vacancy rate expected to
increase from 12.3% in 2015E to 13.0% at the end of 2016 according to CBRE.
22
6 January 2016
23
Industry Overview
With more than 17.5 million sf of office space currently under construction
(equating to 4% of existing inventory), we expect further pressure on office
fundamentals.
In Toronto, fundamentals have been mostly stable, with vacancy up 40 bps to
9.9% at Q3/15 from 9.5% at Q4/14. However there is a clear divergence between
the downtown market, where demand is strong, and the suburban market where
vacancy is now at an 11-year high at 15.1%. For the most part, we are not
expecting same-property revenue growth from office portfolios, with Allied
Properties REIT’s portfolio being the notable exception. Allied’s 2015 results were
negatively impacted by vacancies in its Western Canada portfolio and lower
tenant recoveries. However, we believe internal growth should pick up in 2016 as
leasing activity in the REIT’s downtown Toronto properties has been healthy.

Industrial fundamentals remained steady in 2015 and are expected to improve in
2016, driven by increasing demand for logistics and distribution space. Although
there is currently 23.3 million sf of new space under construction (1.3% of total
inventory), we understand that a large portion of this space is pre-leased and as a
result should not impact fundamentals. CBRE expects the national average net
rental rate to increase 2.2% in 2016 to $6.59 psf, and the availability rate to
remain flat at 5.8%.

Retail fundamentals were challenged in 2015 due to elevated vacancy levels.
Online sales continue to take market share away from bricks and mortar retailers,
and a number of retail store closures in 2015 negatively impacted occupancy
rates.

Residential fundamentals were mixed in 2015. According to CMHC, the national
vacancy rate increased 50 bps year-over-year to 3.3% in October 2015. However,
the increase stemmed mostly from lower net migration to the resource-producing
regions whereas residential fundamentals remained strong in British Columbia
and Ontario and are improving in Atlantic Canada.

Lodging fundamentals improved in both Canada and the U.S. in 2015, a trend
which is expected to continue through 2016. Improved hotel demand, coupled
with stable supply, should drive higher revenue per available room (RevPAR) and
cash flow growth. Demand has been helped by the weak Canadian dollar, which is
resulting in increased travel within and to Canada.
Property market fundamentals by asset class and market are discussed in greater
detail in an Appendix on page 49.
CANADIAN REITS ARE TRADING AT SIZABLE DISCOUNTS TO NAV AND APPEAR
ATTRACTIVELY VALUED RELATIVE TO PRIVATE MARKET VALUES AND OTHER YIELDORIENTED INVESTMENTS
In our view, Canadian REITs are attractively valued under most valuation metrics, as
detailed below:




Premiums/discounts to private market values: implied cap rates and price to NAV;
Cash flow multiples;
Implied cap rates as compared to long-term bond yields and BBB corporate bond
yields; and,
Canadian REITs continue to offer generous yields compared to other high-yielding
equities.
Net asset value – Canadian REITs/REOCs are trading at a sizable discount
The demand for real estate investment remains strong and cap rates compressed
slightly in 2015. However REIT unit prices have been soft due to concerns of rising
interest rates and lower rental income expectations particularly for properties located
in Western Canada. Currently, REITs/REOCs under coverage are trading at an implied
cap rate of 6.4% on a weighted average basis, unchanged since the end of 2014.
23
6 January 2016
24
Industry Overview
Figure 25: Historical average implied cap rate for REITs/REOCs under coverage
10.0%
8.9%
8.2%
8.0%
7.5%
7.3% 7.2% 7.3%
6.8% 6.8%
6.3% 6.3% 6.5%6.5% 6.3% 6.1%
6.0%
6.0% 6.1% 6.0%
6.3%
6.6% 6.5% 6.4%
6.3% 6.4% 6.4%
6.1%
6.3% 6.4% 6.4%
4.0%
2.0%
Q4/15
Q3/15
Q2/15
Q1/15
Q4/14
Q3/14
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
Q4/10
Q3/10
Q2/10
Q1/10
Q4/09
Q3/09
Q2/09
Q1/09
0.0%
Based on our estimates, Canadian REITs/REOCs under coverage are trading at a
discount to NAV of 13.6% (simple average), the biggest discount since the financial
crisis. Historically, REITs have traded, on average, in line with NAV and at a +2.5%
premium to NAV excluding the financial crisis (2008-2009). We believe that, all else
being equal, REITs should trade at a slight premium to NAV to account for the
diversification, liquidity, and management provided to real estate investors. However,
we do recognize that this gap can also narrow through increasing cap rates, and not
only through higher unit prices.
Figure 26: Historical price to NAV for REITs/REOCs under coverage*
Current NAV Prem / Disc
Historical Average Prem / Disc
Max NAV Premium
Max NAV Discount
40.0%
30.0%
-13.6%
-0.2%
29.5%
-46.2%
Sale of EOP to
Blackstone (peak of
LBO cycle)
20.4%
Mean
reversion
20.0%
12.6%
10.0%
0.0%
-10.0%
-6.3%
-10.2%
-20.0%
-19.3%
-30.0%
Russian debt
crisis/LTCM
debacle
-40.0%
-13.6%
Peak of dotcom
dotcom
bubble
Taper
tantrum
Global credit
crisis
-46.2%
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Jun-07
Dec-07
Dec-06
Jun-06
Jun-05
Dec-05
Dec-04
Jun-04
Jun-03
Dec-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
Dec-97
-50.0%
*Canaccord research coverage is currently suspended for a number of REITs/REOCs. NAV estimates for those REITs/REOCs used in this figure reflect consensus estimates per FactSet.
While most REITs are trading well below NAV, the range is wide and a few are actually
trading above NAV. The company trading at the biggest discount to NAV is Dream
Unlimited Corp. which is heavily exposed to both Saskatchewan and Alberta. Its
portfolio is comprised of a number of different assets although its largest investments
24
6 January 2016
25
Industry Overview
consist of land in Regina, Saskatoon, and Calgary. Demand for new housing in these
markets has declined considerably, and the near-term outlook is soft.
Brookfield Asset Management Inc. is trading at a 2% premium to NAV, the largest in
our coverage universe (excluding CT REIT for which research coverage is currently
suspended). The company is focusing on growing its fee-bearing capital which stood at
US$94.7 billion as of September 30, 2015. Moreover, BAM is aggressively marketing
new funds with the goal of raising a total of US$23 billion in new capital over the next
24 months. As management fees earned on this capital base rise, cash flows and NAV
are poised to increase significantly.
Figure 27: Premium/discount to NAV for REITs/REOCs under coverage
7%
20%
2%
10%
-2%
-2%
-2%
-2%
-1%
-1%
-1%
SRU.un*
CRR.un
CSH.un*
CAR.un
IIP.un
-7%
REI.un
AP.un
-8%
KMP.un
NWH.un
-8%
-5%
-8%
REF.un*
-11%
-16%
DRG.un
-17%
AX.un
RUF.u
-11%
-17%
-13%
-18%
BEI.un
Res. avg.
-19%
AAR.un
SOT.un
-14%
-19%
HOT.un
-20%
BPY
-21%
GRT.un
-23%
CUF.un*
MR.un*
-24%
ACR.un*
-21%
-24%
HR.un*
-26%
D.un
-50%
-49%
-40%
-40%
-32%
-33%
-30%
NVU.un*
-20%
Comm. avg.
-10%
FCR
0%
CRT.un*
BAM
INN.un*
TCN*
DIR.un
MEQ*
DRM
-60%
*Canaccord research currently suspended. NAV estimates reflect consensus estimates per FactSet.
REITs/REOCs are trading slightly below their historical AFFO multiple
Currently, both the commercial and residential REITs/REOCs under coverage are
trading slightly lower than their respective historical average forward AFFO multiples.
Canadian commercial REITs/REOCs are, on average, trading at 13.5x forward
AFFO, below the historical average of 14.2x.

Canadian residential REITs/REOCs are, on average, trading at 15.4x forward
AFFO, lower than the historical average of 16.7x.
While the fear of widening credit spreads or higher long-term interest rates is likely to
remain on the mind of investors, REITs continue to present an attractive option for
retail investors for both exposure to real estate as well as current yield. We note that
Canadian REIT portfolios are larger, the management teams are more experienced
and in many cases deeper, the portfolios are of a higher quality, and the balance
sheets are more conservative than in prior years.

25
6 January 2016
26
Industry Overview
Figure 28: Weighted average forward price to AFFO multiple for REITs/REOCs under coverage
25.0x
20.9x
20.3x
20.0x
Residential average since
2003, 16.7x
17.5x
17.0x
15.4x
15.0x
13.5x
Commercial average since
2003, 14.2x
10.0x
Commercial
Residential
Commercial average since 2003
Q3/15
Q1/15
Q3/14
Q1/14
Q3/13
Q1/13
Q3/12
Q1/12
Q3/11
Q1/11
Q3/10
Q1/10
Q3/09
Q1/09
Q3/08
Q1/08
Q3/07
Q1/07
Q3/06
Q1/06
Q3/05
Q1/05
Q3/04
Q1/04
Q3/03
Q1/03
5.0x
Residential average since 2003
*Canaccord research coverage is currently suspended for a number of REITs/REOCs. AFFO estimates for those REITs/REOCs used in this figure reflect consensus estimates per FactSet.
The REITs/REOCs trading at the lowest AFFO multiples are mostly those with exposure
to office properties and/or to Alberta. Within our coverage universe, Slate Office REIT,
Dream Office REIT, and American Hotel Income Properties REIT LP trade at the lowest
2016 AFFO multiples.



Slate Office REIT trades at 7.6x 2016E AFFO. In our view, the low multiple reflects
the recent increase in exposure to the office market and higher leverage.
Dream Office REIT trades at 7.8x 2016E AFFO as the REIT is likely to face
declining cash flow due to its significant exposure to the Western Canada office
market (40% of NOI).
American Hotel Income Properties REIT LP trades at 8.1x 2016E AFFO. We believe
the low multiple is due to the REIT’s relatively small market cap, unique asset
class, as well as earnings volatility in 2015. However, as the outlook for hotel
fundamentals is healthy, we expect multiple expansion over time.
26
6 January 2016
27
Industry Overview
Figure 29: 2016E AFFO multiples for commercial REITs/REOCs under coverage
25.0x
23.4x
20.0x
18.4x
15.0x
11.4x 11.6x
10.0x
8.1x
7.6x 7.8x
9.2x
8.6x 8.8x
12.2x 12.3x
13.4x 13.5x 13.8x
14.6x
15.2x
15.7x
15.9x 15.9x 16.4x
9.7x 9.9x 10.2x
5.0x
BPY
FCR
CSH.un*
AP.un
REF.un*
REI.un
CRT.un*
SRU.un*
CRR.un
Comm. avg.
GRT.un
DRG.un
HR.un*
NWH.un
AAR.un
INN.un*
AX.un
CUF.un*
ACR.un*
MR.un*
DIR.un
HOT.un
D.un
SOT.un
0.0x
*Canaccord research currently suspended. AFFO estimates reflect consensus estimates per FactSet.
Figure 30: 2016E AFFO multiples for residential REITs/REOCs under coverage
25.0x
20.0x
15.4x
15.5x
BEI.un
14.7x
15.0x
Res. avg.
18.4x
16.7x
12.9x
11.3x
10.0x
8.6x
5.0x
CAR.un
IIP.un
KMP.un
MEQ*
RUF.u
NVU.un*
0.0x
* Canaccord research currently suspended. AFFO estimates reflect consensus estimates per FactSet.
Canadian REITs offer generous yields when compared to investment grade bonds
We believe that a more valuable metric is the spread between REIT yields to BBB
yields, which takes into account credit spreads. Corporate bond yields increased
modestly during 2015 due to widening credit spreads. However, a decline in REIT unit
prices pushed REIT yields upwards and caused the spread between REIT yields and
Canadian 10-year BBB bond yields to increase 57 bps over the course of 2015 to 267
bps.
27
6 January 2016
28
Industry Overview
Figure 31: Canadian REIT distribution yields versus 10-year BBB corporate yields
10%
300
250
8%
150
4%
Spread (bps)
Yield (%)
200
6%
100
2%
50
0%
Spread (RHS)
Average REIT distribution yield (LHS)
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
0
CAN 10-Yr BBB Yield (LHS)
The spread between the average Canadian REIT AFFO yield and the 10-year GoC bond
yield continued to rise in 2015. The spread is currently 584 bps, which is the highest
level in the last five years (Figure 32). Similarly, the spread between the average
Canadian REIT distribution yield and long-term bond yields has widened as REIT unit
prices declined in 2015. Currently, the spread is 514 bps, a level last observed in mid2009 (Figure 33).
Figure 32: Canadian REIT AFFO yields versus 10-year GoC. yield
10.00%
Figure 33: Canadian REIT distribution yields versus 10-year GoC yield
600
10.00%
8.00%
200
2.00%
6.00%
4.00%
200
Spread (bps)
4.00%
400
Yield (%)
6.00%
Spread (bps)
8.00%
400
2.00%
Spread (RHS)
REIT AFFO yield (LHS)
0.00%
Spread (RHS)
Q1/15
Q1/14
Q1/13
0
Q1/12
Q1/15
Q1/14
Q1/13
Q1/12
Q1/11
Q1/10
0
Q1/11
0.00%
Q1/10
Yield (%)
600
REIT distribution yield (LHS)
With the decline in REIT unit prices, distribution yields are at multi-year highs. It
appears that investors are either expecting an increase in long-term interest rates or
continued softening in fundamentals. From our coverage, almost every REIT is well
positioned to maintain distributions through some economic softening. Further, we
expect distribution increases from a number of REITs over the next 12 months (more
later). Notwithstanding these risks, investors continue to take advantage of the
relatively high yields in real estate investments. Fund flows into real estate equities
(excluding reinvested distributions) have increased significantly over the first 11
months of 2015 at +$228 million, compared to +$26 million for the full-year 2014
(Figure 34).
28
6 January 2016
29
Industry Overview
Total net assets (RHS)
Total net assets at month end
Oct-15
Jul-15
Apr-15
Oct-14
Jan-15
Jul-14
Apr-14
Oct-13
Jan-14
Jul-13
Apr-13
Oct-12
Jan-13
Jul-12
0
Apr-12
(60)
Oct-11
500
Jan-12
(40)
Jul-11
1,000
Apr-11
(20)
Jan-11
1,500
Jul-10
0
Oct-10
2,000
Apr-10
20
Jan-10
2,500
Jul-09
40
Oct-09
3,000
Apr-09
60
Jan-09
3,500
Jul-08
80
Oct-08
4,000
Apr-08
100
Jan-08
Fund flows (including reinvested dividends)
Figure 34: Fund flows into Canadian real estate equities ($ millions)
Total fund flows (LHS)
Source: Investment Funds Institute of Canada, Canaccord Genuity
Canadian REITs continue to offer higher yields compared to other yield-oriented
investments
The S&P/TSX Capped REIT Index is currently yielding 6.5%, a 150 bp premium to the
S&P/TSX Capped Utilities Index, which yields 5.0%. On average, the S&P/TSX Capped
REIT Index yield is 199 bps higher than the average of the Telecommunication
Services, Utilities, and Financials indices, 309 bps higher than the yield provided by
the broader market, and 514 bps higher than the 10-year GoC bond (Figure 35).
Figure 35: Current yield on for Canadian sector indices and the 10-year GoC bond
7.0%
6.5%
6.0%
5.0%
5.0%
4.5%
4.2%
4.0%
3.4%
3.0%
2.0%
1.4%
1.0%
0.0%
S&P/TSX
S&P/TSX
S&P/TSX
Capped REIT Capped Utilities
Capped
Index
Index
Telecom Index
S&P/TSX
Capped
Financials
Index
S&P/TSX
Composite
Index
10-yr GoC bond
On a weighted average basis, Canadian REITs/REOCs under coverage are currently
yielding 6.3%. Canadian REITs/REOCs continue to provide compelling yields, with a
third of REITs/REOCs under coverage yielding greater than 8%.
29
6 January 2016
30
Industry Overview
Figure 36: Distribution/dividend yields for the REITs/REOCs under coverage
D.un
10.6%
SOT.un
10.0%
9.7%
9.4%
MR.un*
DIR.un
9.3%
CUF.un*
9.2%
DRG.un
9.0%
NWH.un
NVU.un*
8.8%
8.5%
HOT.un
ACR.un*
8.4%
7.8%
7.3%
RUF.u
INN.un*
7.1%
7.0%
AAR.un
CRR.un
6.3%
6.7%
6.1%
GRT.un
Wtd. avg.**
HR.un*
6.0%
5.7%
KMP.un
REI.un
5.5%
SRU.un*
5.2%
CRT.un*
4.6%
BPY
4.8%
4.5%
CAR.un
4.7%
4.3%
CSH.un*
FCR
4.3%
BEI.un
AP.un
4.3%
3.5%
IIP.un
2.6%
TCN*
0.0%
DRM
BAM
0.0%
0%
MEQ*
1.5%
5%
REF.un*
10%
AX.un
12.9%
15%
* Canaccord research currently suspended
**Weighted average of REITs/REOCs excludes BAM, BPY, DRM, and TCN
Source: FactSet, Canaccord Genuity Estimates
MOST REITS ARE WELL-POSITIONED WITH HEALTHY BALANCE SHEETS AND
REASONABLE PAYOUT RATIOS
In general, most Canadian REITs have taken advantage of favourable debt capital
market conditions over the past few years to refinance debt at lower rates and reduce
payout ratios. On a weighted average basis, REITs/REOCs under coverage are
distributing approximately 83% of 2016E AFFO. This is down from 2014 and 2015,
when the payout ratio for REITs/REOCs under coverage was 86% of AFFO.
Figure 37: AFFO payout ratios are forecast to decline*
100%
95%
89%
90%
89%
88%
86%
85%
86%
85%
86%
83%
81%
80%
75%
70%
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
*2015-2017 AFFO payout ratio estimates assume current level of distributions
30
6 January 2016
31
Industry Overview
For the REITs/REOCs under coverage, 2016E AFFO payout ratios range from 59% for
InterRent REIT to 113% for Dream Global REIT (of note, Mainstreet Equity Corp. does
not pay a dividend).
On a weighted average basis, the 2016 AFFO payout ratio is 83%, with six
REITs/REOCs below 80%, and all but four REITs/REOCs are below 100%.
107%
BPY
113%
104%
101%
97%
83%
AX.un
CUF.un*
83%
Wtd. avg.
96%
83%
RUF.u
CRR.un
82%
94%
82%
HR.un*
MR.un*
86%
81%
GRT.un
84%
81%
AAR.un
84%
81%
ACR.un*
81%
80%
80%
80%
SRU.un*
71%
CSH.un*
80%
68%
CRT.un*
68%
HOT.un
60%
REF.un*
70%
67%
59%
80%
BEI.un
90%
76%
100%
84%
110%
REI.un
120%
NWH.un
Figure 38: 2016E AFFO payout ratios**
50%
40%
30%
10%
0%
20%
DRG.un
D.un
FCR
DIR.un
KMP.un
CAR.un
SOT.un
INN.un*
NVU.un*
AP.un
IIP.un
MEQ*
0%
**Excludes BAM, DRM, and TCN
Most REIT management teams have placed an increased emphasis on maintaining a
strong balance sheet. Currently, 15 of the REITs under coverage have leverage under
50%, with leverage ratios ranging from 23% for Granite REIT to 63% for NorthWest
Healthcare Properties REIT.
Figure 39: Leverage ratios (including convertible debentures as debt) as at quarter-end Q3/15
50%
51%
51%
52%
52%
52%
52%
52%
54%
54%
AAR.un
CAR.un
HOT.un
NVU.un*
IIP.un
MR.un*
BPY
DIR.un
CRR.un
ACR.un*
RUF.u
CUF.un*
KMP.un
45%
SRU.un*
63%
50%
AX.un
45%
D.un
NWH.un
49%
DRG.un
44%
FCR
62%
49%
CRT.un*
43%
REI.un
SOT.un
49%
HR.un*
41%
39%
BEI.un
CSH.un*
38%
23%
40%
REF.un*
35%
60%
58%
47%
48%
55%
46%
MEQ*
80%
20%
INN.un*
AP.un
GRT.un
0%
*Canaccord research currently suspended.
Excludes BAM, DRM, and TCN
Source: REIT/REOC Reports, Canaccord Genuity Estimates
31
6 January 2016
32
Industry Overview
Modest cash flow growth expected in 2016
Aside from REITs with significant exposure to Alberta, we believe that fundamentals
are for the most part stable and should lead to modest cash flow growth. We expect
Canadian REITs/REOCs to post average AFFO per unit growth of 3.2% in 2016 and
3.4% in 2017 (weighted average).
Expect modest internal growth from most REITs/REOCs. We expect most REITs to
grow same-property NOI through leasing activity and positive rental spreads on
expiring leases. However, for REITs/REOCs with significant exposure to Western
Canada, fundamentals have softened considerably due to the impact from the
drop in oil and commodity prices. We expect internal growth to be muted for these
REITs/REOCs due to downward pressure on occupancy and rental rates.
Development projects should be accretive. In the current low cap rate
environment, accretive acquisition opportunities are difficult to find. Therefore a
number of REITs have become more active in new development to drive FFO
growth.
Refinancing debt should continue to boost cash flow. Although much of the
interest expense savings from refinancing debt at lower rates has already been
achieved, there are still potential savings from refinancing debt at market rates.



Figure 40: Growth in AFFO per unit/share (weighted average for REITs/REOCs under coverage*)
10.0%
8.6%
8.6%
8.0%
7.0%
5.6%
6.0%
4.0%
3.9%
3.9%
3.2%
3.2%
3.2% 3.2% 3.4%
2.0%
0.1%
0.0%
-2.0%
-2.8%
-4.0%
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15E
'16E
'17E
*Excludes BAM, BPY, DRM, and TCN
**Canaccord research coverage is suspended for a number of REITs/REOCs. AFFO estimates used to calculate the weighted average year-overyear growth rates for those REITs/REOCs reflect consensus estimates per FactSet.
The following table highlights our estimates of FFO and AFFO per diluted unit/share
for REITs/REOCs under coverage.
32
6 January 2016
33
Industry Overview
Figure 41: Forecast FFO per unit/share and AFFO per unit/share growth
Diluted FFO per unit/share
REIT/REOC
2015E
FFO per unit/sh growth
2016E
2017E
2016E
Diluted AFFO per unit/share
2017E
2015E
2016E
2017E
AFFO per unit/sh growth
2016E
2017E
ACR.un*
$1.23
$1.29
$1.36
5.0%
5.7%
$0.93
$0.96
$1.03
3.6%
7.7%
AX.un
$1.50
$1.49
$1.49
-0.5%
-0.1%
$1.32
$1.30
$1.29
-1.9%
-0.4%
BPY (US$)
$1.17
$1.36
$1.48
16.6%
8.7%
$0.79
$0.99
$1.12
26.4%
13.1%
REF.un*
$3.03
$3.09
$3.17
1.8%
2.8%
$2.60
$2.65
$2.78
1.9%
4.8%
CUF.un*
$1.79
$1.77
$1.80
-1.2%
2.2%
$1.53
$1.51
$1.56
-1.1%
3.3%
DRG.un
$0.77
$0.81
$0.88
5.9%
8.6%
$0.65
$0.71
$0.78
8.0%
10.0%
HR.un*
$1.91
$1.93
$1.97
1.4%
1.9%
$1.62
$1.65
$1.70
1.7%
3.4%
MR.un*
$1.00
$1.00
$1.02
0.4%
2.0%
$0.82
$0.82
$0.84
0.5%
1.6%
AAR.un
$0.39
$0.43
$0.44
8.4%
2.3%
$0.35
$0.38
$0.39
9.8%
2.5%
DIR.un
$0.95
$1.00
$1.02
4.8%
2.1%
$0.80
$0.83
$0.86
4.5%
2.9%
GRT.un
$3.39
$3.54
$3.67
4.5%
3.8%
$2.71
$2.84
$2.97
4.9%
4.5%
AP.un
$2.17
$2.38
$2.55
10.0%
7.1%
$1.75
$1.99
$2.16
13.5%
8.5%
D.un
$2.81
$2.77
$2.73
-1.6%
-1.5%
$2.41
$2.23
$2.18
-7.5%
-1.9%
SOT.un
$1.04
$1.12
$1.13
8.0%
0.4%
$0.81
$0.93
$0.93
14.0%
0.5%
BEI.un
$3.56
$3.51
$3.53
-1.6%
0.8%
$3.12
$3.05
$3.08
-2.0%
0.8%
CAR.un
$1.64
$1.76
$1.81
7.2%
3.1%
$1.35
$1.46
$1.51
8.1%
3.4%
IIP.un
$0.36
$0.47
$0.54
32.1%
14.3%
$0.29
$0.39
$0.46
37.5%
17.0%
KMP.un
$0.80
$0.84
$0.88
6.2%
4.4%
$0.65
$0.71
$0.75
9.9%
4.8%
MEQ*
$2.68
$2.80
$2.91
4.3%
4.1%
$2.27
$2.33
$2.42
2.6%
4.0%
NVU.un*
$2.42
$2.40
$2.50
-0.9%
4.0%
$2.07
$2.04
$2.13
-1.3%
4.3%
RUF.u (US$)
$0.45
$0.51
$0.53
13.1%
2.9%
$0.39
$0.45
$0.47
15.2%
2.9%
SRU.un*
$2.10
$2.20
$2.25
4.5%
2.6%
$1.99
$2.07
$2.13
4.3%
2.7%
CRR.un
$1.12
$1.11
$1.14
-0.7%
2.6%
$0.94
$0.93
$0.95
-1.1%
2.0%
CRT.un*
$1.04
$1.07
$1.10
3.8%
2.8%
$0.81
$0.86
$0.89
5.8%
4.3%
FCR
$1.05
$1.11
$1.16
6.0%
4.2%
$0.93
$1.00
$1.05
7.0%
5.1%
REI.un
$1.75
$1.68
$1.68
-3.9%
0.0%
$1.57
$1.51
$1.51
-4.1%
0.3%
INDUSTRIAL
OFFICE
RESIDENTIAL
RETAIL
HEALTH CARE/SENIORS
CSH.un*
$0.78
$0.84
$0.88
7.3%
5.1%
$0.72
$0.78
$0.81
8.6%
4.8%
NWH.un
$0.86
$0.94
$0.98
9.8%
4.0%
$0.73
$0.77
$0.81
5.0%
5.0%
HOT.un**
$1.27
$1.51
$1.70
19.1%
12.3%
$1.10
$1.32
$1.47
19.6%
12.1%
INN.un*
$0.61
$0.67
$0.71
9.2%
5.9%
$0.45
$0.50
$0.54
11.1%
8.1%
LODGING
BAM (US$)
$1.47
$1.78
$1.92
21.1%
7.8%
NA
NA
NA
NA
NA
DRM (EPS)
$1.50
$1.33
$1.41
-11.8%
6.1%
NA
NA
NA
NA
NA
TCN* (EPS)
$0.75
$0.62
$0.73
-17.5%
18.7%
NA
NA
NA
NA
NA
*Canaccord research is currently suspended. Estimates reflect consensus estimates per FactSet
**US$ estimates converted to C$ using an exchange rate of US$1.00=C$1.38
REITs/REOCs with highest expected cash flow growth in 2016
From the large cap REITs/REOCs, we expect the strongest 2016 AFFO per unit/share
growth from Brookfield Property Partners L.P. (+26%) and Allied Properties REIT
(+13%). From the small cap REITs/REOCs, we expect the strongest growth from
InterRent REIT (+38%), American Hotel Income Properties REIT LP (+20%), and Pure
Multi-Family REIT LP (+15%):
33
6 January 2016
34
Industry Overview
Brookfield Property Partners L.P. has several drivers of cash flow growth for the
next few years, in our view. The most significant and immediate driver is rent
commencement at its properties in Lower Manhattan as tenants take occupancy.
BPY should also benefit from marking leases to market upon expiry and from
leveraging its active development/redevelopment pipeline.

We expect Allied Properties REIT to post healthy cash flow growth in the near term
as it completes development and redevelopment projects. Demand for space in
Allied’s core King West market remains strong and should offset some of the
softness in the REIT’s Western Canadian markets.

InterRent REIT’s portfolio is primarily concentrated in Ontario where residential
fundamentals are healthy. Going forward, we expect the REIT to achieve strong
cash flow per unit growth through raising rental rates, increasing operating
efficiencies, and from stabilizing the 442-suite Bell Street redevelopment
property.

Due to healthy hotel fundamentals in the U.S., we expect improvement in
American Hotel Income Properties REIT LP’s operating metrics, which should lead
to growth in same-property NOI and FFO. The REIT can also grow accretively
through both acquisitions and property expansions.

Pure Multi-Family REIT LP’s portfolio of high-quality apartment properties is
primarily located in large markets in Texas where fundamentals are strong. We
expect the REIT to generate robust same-property NOI growth over the next few
years, driving cash flows and NAV higher.
2016E AFFO per unit/share growth for the remaining REITs/REOCs under coverage is
expected to range from +14% to -8% (Figure 42).

Figure 42: 2016E AFFO per unit/share growth forecast
45%
38%
30%
26%
20%
15% 14%
15%
13%
11% 10% 10%
9% 8% 8%
7% 6%
5% 5% 4% 4%
4% 3%
2% 2%
0%
0%
-1% -1% -1% -2% -2%
-4%
-8%
D.un
REI.un
AX.un
BEI.un
NVU.un*
CUF.un*
CRR.un*
MR.un*
HR.un*
REF.un*
MEQ*
ACR.un*
SRU.un*
DIR.un
GRT.un
NWH.un
CRT.un*
FCR
DRG.un
CAR.un
CSH.un*
AAR.un
KMP.un
INN.un*
AP.un
SOT.un
RUF.u
HOT.un
BPY
IIP.un
-15%
*Canaccord research coverage is currently suspended. Estimates reflect FactSet consensus estimates.
Distribution growth should continue in 2016
While REIT unit prices have been soft, fundamentals are steady for most REITs. We
believe that the expected cash flow per unit growth in 2016 should allow for a number
of REITs/REOCs to increase distributions/dividends over the next 12 months.
34
6 January 2016
35
Industry Overview
As detailed in our latest Quarterly Distributions Monitor publication, there are six
REITs/REOCs that we expect will increase distributions over the next 12 months:
Brookfield Asset Management Inc., Brookfield Property Partners L.P., CAP REIT,
Granite REIT, InterRent REIT, and Pure Industrial Real Estate Trust.
Changes to target prices
In conjunction with publishing our 2016 Real Estate Outlook, we are making several
changes to our target prices:





We are lowering our target price slightly for Dream Global REIT to C$9.25 (from
C$9.50), which equates to a 5% discount to NAV. The new target price, combined
with an annualized distribution per unit of $0.80, equates to a forecast total
return of 16%. While we expect the fundamental performance of the REIT’s assets
to be solid in 2016, we do not believe that the unit price will reach NAV in the
near-term.
We are reducing our target price for Dream Office REIT to C$18.50 (from
C$20.00), which equates to a 20% discount to NAV. The outlook for the Alberta
office market continues to weaken, and it is difficult to see a catalyst in the nearterm. Additionally, with NOI poised to decline in 2016, and the increase in capex,
the likelihood of a distribution cut has increased materially.
We are lowering our target price for RioCan REIT to C$27.00 (from C$28.00),
which equates to a 5% premium to NAV. The new target price, combined with an
annualized distribution per unit of $1.41, equates to a forecast total return of
20%.
For NorthWest Healthcare Properties REIT, we are raising our target price to
C$9.15 (from C$8.75), which is in line with our NAV estimate. The new target
price, combined with an annualized distribution per unit of $0.80, equates to a
forecast total return of 11%.
Reflecting the softer housing market in both Saskatchewan and Alberta, we are
lowering our target price for Dream Unlimited Corp. to C$10.00 (from C$12.00).
Though cash flow should rise in 2016 from condo completions in Toronto,
investors are likely to remain cautious until there are some signs of improvement
in Western Canada housing.
Upgrading Slate Office REIT to a BUY
While suburban office fundamentals have softened, Slate Office REIT should grow
cash flow in 2016 as a result of acquisitions in 2015. In addition, the attractive 10.6%
current yield is fully covered by cash flow. The REIT’s units are currently trading at an
18% discount to NAV and only 7.6x our 2016 AFFO estimate, the lowest in our
coverage universe. While fundamentals have softened slightly, and leverage is
relatively high, the REIT’s units provide solid value and we are therefore upgrading our
rating for Slate Office REIT from HOLD to BUY.
35
6 January 2016
36
Industry Overview
Figure 43: Changes to target prices and ratings
Price
REIT/REOC
31-Dec-15
Target
Price
Rating
Old
Current
Old
Current
Pre-tax
Prem
Annual
Forecast
AFFO
Target AFFO
NAV per
(disc)
dividend/
total
multiple
multiple
unit/share
to NAV
distribution
return
2017E
2017E
ACR.un*
$8.84
BUY
S
S
$11.69
-24%
$0.78
S
8.6x
S
AX.un
$12.80
BUY
BUY
$15.50
$15.43
-17%
$1.08
30%
9.9x
12.0x
BPY (US$)
$23.24
BUY
BUY
$28.00
$28.81
-19%
$1.06
25%
20.7x
24.9x
REF.un*
$42.06
HOLD
S
S
$45.67
-8%
$1.80
S
15.1x
S
CUF.un*
$14.71
HOLD
S
S
$19.19
-23%
$1.47
S
9.4x
S
DRG.un
$8.66
BUY
BUY
$9.25
$9.73
-11%
$0.80
16%
11.2x
11.9x
HR.un*
$20.05
HOLD
S
S
$25.46
-21%
$1.35
S
11.8x
S
MR.un*
$7.21
S
S
$9.10
-21%
$0.68
S
8.6x
S
$9.50
INDUSTRIAL
AAR.un
$4.37
BUY
BUY
$5.25
$5.42
-19%
$0.31
27%
11.1x
13.3x
DIR.un
$7.18
BUY
BUY
$9.00
$10.78
-33%
$0.70
35%
8.4x
10.5x
GRT.un
$37.96
HOLD
HOLD
$41.00
$47.68
-20%
$2.30
14%
12.8x
13.8x
AP.un
$31.57
HOLD
HOLD
$35.50
$32.35
-2%
$1.50
17%
14.6x
16.5x
D.un***
$17.37
HOLD
HOLD
$18.50
$22.99
-24%
$2.24
15%
8.0x
8.5x
$7.05
HOLD
BUY
$7.50
$8.61
-18%
$0.75
17%
7.6x
8.0x
OFFICE
SOT.un
$20.00
RESIDENTIAL
BEI.un
$47.45
HOLD
HOLD t
$50.00
$57.28
-17%
$2.04
10%
15.4x
16.2x
CAR.un
$26.84
HOLD
HOLD
$30.00
$27.20
-1%
$1.22
16%
17.8x
19.9x
$6.56
BUY
BUY
$7.50
$6.62
-1%
$0.23
18%
14.3x
16.3x
KMP.un
$10.51
HOLD
BUY
$11.50
$11.39
-8%
$0.60
15%
14.0x
15.4x
MEQ*
$30.07
BUY
S
S
$49.87
-40%
$0.00
S
12.4x
S
NVU.un*
$17.56
HOLD
S
S
$23.61
-26%
$1.63
S
8.2x
S
$5.13
BUY
BUY
$6.50
$6.14
-16%
$0.38
34%
11.0x
14.0x
SRU.un*
$30.19
HOLD
S
S
$30.67
-2%
$1.65
S
14.2x
S
CRR.un
$12.80
BUY
HOLD
$13.00
$13.00
-2%
$0.89
9%
13.5x
13.7x
CRT.un*
$13.00
HOLD
S
S
$12.15
7%
$0.68
S
14.6x
S
FCR
$18.35
HOLD
BUY
$22.00
$19.95
-8%
$0.86
25%
17.5x
21.0x
REI.un
$23.69
HOLD
BUY
$28.00
$27.00
$25.56
-7%
$1.41
20%
15.7x
17.9x
S
$12.88
-1%
$0.55
S
15.6x
S
$8.75
$9.15
$9.16
-2%
$0.80
11%
11.0x
11.3x
IIP.un
RUF.u (US$)
RETAIL
HEALTH CARE/SENIORS
CSH.un*
$12.70
NWH.un
$8.93
HOLD
S
HOLD
LODGING
HOT.un**
INN.un*
$10.65
BUY
BUY
$12.50
$12.39
-14%
$0.90
26%
7.2x
8.5x
$5.13
HOLD
S
S
$5.42
-5%
$0.40
S
9.5x
S
$39.00
$30.96
2%
$0.48
25%
NA
NA
$10.00
$14.33
-49%
$0.00
38%
NA
NA
S
$13.23
-32%
$0.24
S
NA
NA
$31.53
BUY
BUY
DRM
$7.27
BUY
BUY
TCN*
$9.06
BUY
S
BAM (US$)
$12.00
*Canaccord research coverage is currently suspended. Estimates reflect FactSet consensus estimates
**US$ estimates converted to C$ using an exchange rate of US$1.00=C$1.38
***Forecast total return for D.un assumes a distribution cut to $1.50 (from $2.24)
For 2016, we are forecasting a weighted average total return of 19% from our
coverage universe. On an individual REIT/REOC basis, we are forecasting total returns
ranging from a high of 38% for Dream Unlimited Corp. to 9% for Crombie REIT.
36
6 January 2016
37
Industry Overview
9%
10%
10%
16%
DRG.un
11%
16%
CAR.un
15%
14%
17%
SOT.un
15%
17%
AP.un
15%
18%
IIP.un
20%
19%
21%
20%
25%
BPY
25%
25%
25%
BAM
26%
30%
27%
30%
35%
34%
35%
40%
38%
Figure 44: 2016 forecast REIT/REOC total returns to one-year target price
5%
CRR.un
BEI.un
NWH.un
GRT.un
KMP.un
D.un
Weighted
Average*
REI.un
FCR
Simple
Average
HOT.un
AAR.un
AX.un
RUF.u
DIR.un
DRM
0%
By asset class, we expect the highest returns in 2016 from the specialty real estate
REOCs (comprised of BAM and DRM) with a weighted average forecast total return of
26%, followed by diversified commercial at 25% and industrial at 21% (Figure 45).
Figure 45: 2016 forecast REIT/REOC total returns by sector (weighted averages)
30%
26%
25%
25%
21%
20%
20%
19%
16%
15%
15%
10%
5%
Residential
Office
Weighted average
Retail
Industrial
Diversified
commercial
Specialty real estate
0%
37
6 January 2016
38
Industry Overview
KEY CONCERNS FOR 2016
In our view, there are a handful of risks which could lead to a year of negative returns
from Canadian REITs:




We believe that one of the key reasons for the weak performance from REITs in
2015 was the concern that long-term interest rates would rise. Going forward, the
outlook for interest rates will remain a key concern, and could impact REIT unit
prices materially. To the extent U.S. economic growth drives the U.S. 10-year bond
yield higher, Canadian long-term interest rates could follow, in spite of a lack of
growth in Canada.
Less material, but also a factor, fundamentals have softened somewhat and the
pace of cash flow growth has declined. We are currently forecasting AFFO per unit
growth of 3.2% for 2016, and 3.4% for 2017. This compares with our January
2015 forecast of 5.5% growth in AFFO per unit for 2016.
With significant office development across Canada, it is possible that
fundamentals will continue to soften. There is new supply being developed in
Calgary, Edmonton, Toronto, and Vancouver, which could lead to increased
vacancy. Although less of a concern, there is a large amount of industrial and
rental apartment space under development.
Consumer debt levels are relatively high and relatedly, the Canadian housing
market has been extremely strong for a number of years in both Toronto and
Vancouver. A correction in housing prices, possibly as a result of an increase in
the five-year bond yield, could negatively affect the Canadian economy
Should the price of oil remain low for an extended period of time, the Canadian
economy could suffer. Specifically, those REITs with exposure to Alberta could
face additional pressure.
Key concern #1: Long-term interest rates could increase in 2016 in spite of a soft
Canadian economy
In our view, the performance from Canadian REITs was disappointing in 2015 due to
concerns of an increase in Canadian long term interest rates. Going forward, there is a
possibility that long-term interest rates in Canada could increase in tandem with U.S.
interest rates, even if economic growth in Canada is modest. This could lead to an
increase in cap rates, and drive real estate values lower as the negative impact of
higher cap rates would not be adequately mitigated by growth in rental rates.
Strong correlation between Canada and U.S. long-term interest rates. The Canada and
U.S. 10-year government bond yields have historically been highly correlated with
each other, with a correlation coefficient of 0.98 over the last 30 years (Figure 46).
38
6 January 2016
39
Industry Overview
Figure 46: Month-end Canada and U.S. 10-year government bond yields since 1985
14.0%
Correlation
0.97603244
Current spread
-88 bps
Average spread
12.0%
50 bps
Max spread
258 bps
Min spread
-88 bps
10.0%
8.0%
6.0%
4.0%
2.0%
Canada
Jan-15
Jan-13
Jan-14
Jan-12
Jan-10
Jan-11
Jan-08
Jan-09
Jan-06
Jan-07
Jan-04
Jan-05
Jan-03
Jan-01
Jan-02
Jan-99
Jan-00
Jan-97
Jan-98
Jan-95
Jan-96
Jan-94
Jan-92
Jan-93
Jan-90
Jan-91
Jan-88
Jan-89
Jan-86
Jan-87
Jan-85
0.0%
U.S.
Source: Bloomberg, ThomsonONE, Canaccord Genuity
However, we note that recently there has been some divergence between Canadian
and U.S. long-term interest rates. While the average spread between U.S. and Canada
10-year bond yields over the last 30 years has been +50 bps, the current spread is 88 bps. In our view, this is likely because U.S. economic growth has been stronger,
whereas the Canadian economy has softened due to the oil price collapse.
Considering the spread between Canadian and U.S. bond yields is already abnormally
wide, we believe Canadian long-term interest rates could rise in lockstep with U.S.
long-term interest rates, without corresponding economic growth in Canada. This is a
key risk for the Canadian real estate sector. Alternatively, the divergence between the
two bond yields could continue, and Canadian long-term interest rates only rise when
the economy returns to healthy GDP growth.
The U.S. Federal Reserve recently increased short-term interest rates, which is likely to
drive long-term rates higher as well. The consensus estimate is for a 50 bp increase in
the U.S. 10-year bond yield in 2016.
39
6 January 2016
40
Industry Overview
Figure 47: Canada vs. U.S. 10-year government bond yields have diverged over the last few years
4.0%
100 bps
80 bps
3.5%
60 bps
40 bps
3.0%
20 bps
2.5%
0 bps
-20 bps
2.0%
-40 bps
-60 bps
1.5%
-80 bps
1.0%
Spread (RHS)
Canada (LHS)
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
-100 bps
U.S. (LHS)
Source: Bloomberg, ThomsonONE, Canaccord Genuity
Rising long-term interest rates could result in upward pressure on cap rates
Cap rates have generally followed the same course as long-term interest rates and
have been steadily declining since the early 1990s. However, in the scenario that
there is a material spike in interest rates, especially if there is no corresponding
economic growth, there would likely be upward pressure on cap rates. The following
chart depicts the average impact to our NAV estimates of 25 bp and 50 bp increases
to our utilized cap rates, all else equal. A 25 bp increase in cap rates would result in a
7.9% weighted average drop in our NAV estimates for REITs/REOCs under coverage,
whereas a 50 bp increase in cap rates would result in a 15.2% drop.
40
6 January 2016
41
Industry Overview
Figure 48: Sensitivity of sector NAV to changes in utilized cap rates
0.0%
-7.9%
-10.0%
-15.2%
-20.0%
-28.3%
-30.0%
+25 bps
+50 bps
+100 bps
Source: Canaccord Genuity Estimates
In the chart below, we detail the impact of a 50 bp increase in the utilized cap rate on
each individual REIT/REOC under coverage. Generally, REITs/REOCs which are more
highly levered and which are currently valued at lower cap rates are more sensitive to
increases in cap rates. The impact for REITs/REOCs under coverage ranges from a
21% decline in our NAV estimate for Brookfield Property Partners to a 7% decline for
Granite REIT.
Figure 49: NAV sensitivity to a 50 bp increase in utilized cap rates
0.0%
-5.0%
-7%
-10.0%
-10%
-11% -11%
-15.0%
-17%
-20.0%
-16%
-17% -17%
-14%
-15% -15% -15% -14% -14%
-16% -15%
-20% -19%
-21%
GRT.un
HOT.un
AP.un
REI.un
RUF.u
AAR.un
DIR.un
BEI.un
FCR
SOT.un
NWH.un
DRG.un
CRR.un
D.un
AX.un
CAR.un
KMP.un
IIP.un
BPY
-25.0%
Source: Canaccord Genuity Estimates
Key concern #2: Further softening in real estate fundamentals could put pressure
on cash flow growth
Cash flow per unit growth for Canadian REITs has been below expectations in 2015.
At the beginning of 2015, we expected weighted average AFFO per unit growth of
5.5% for REITs/REOCs under coverage. However, fundamentals for certain asset
classes and geographies have softened, and our current 2015 estimate for average
41
6 January 2016
42
Industry Overview
AFFO per unit/share growth is 3.2% with eight REITs/REOC expected to post negative
year-over-year cash flow per unit growth for 2015.
25.4%
Figure 50: 2015E AFFO per unit/share growth for Canadian REITs/REOCs
11.0%
11.2%
12.0%
12.5%
13.1%
MR.un*
AAR.un
IIP.un
MEQ*
6.7%
SRU.un*
6.3%
FCR
BEI.un
10.8%
5.5%
9.8%
4.7%
AX.un
3.0%
DIR.un
2.9%
RUF.u
NVU.un*
4.2%
2.3%
3.1%
2.1%
REI.un
CUF.un*
0.2%
5%
1.2%
10%
CRR.un
15%
ACR.un*
20%
14.5%
25%
17.7%
30%
-1.3%
-0.3%
-1.5%
CSH.un*
-4.1%
HR.un*
-4.5%
SOT.un
INN.un*
KMP.un
CRT.un*
GRT.un
CAR.un
HOT.un
AP.un
-10.4%
BPY
-20%
NWH.un
-15%
DRG.un -12.8%
-10%
D.un
-5.6%
-5%
REF.un*
0%
**Excludes BAM, DRM, and TCN
Source: REIT/REOC Reports, Canaccord Genuity Estimates
Looking forward to 2016, we expect further softening in fundamentals for some asset
classes and geographies. Among real estate asset classes, the office sector remains
the most vulnerable as there is an elevated amount of incoming supply. According to
CBRE data, there is significant office space construction in Calgary, Edmonton, and
Vancouver (Figure 51). As of Q3/15, office space under construction represented
8.8% of existing inventory in Calgary, 8.3% in Edmonton, and 4.8% in Vancouver (4.0%
nationally).
In Vancouver, though the proportion of office space inventory under construction is
higher than the national average, we do not expect fundamentals to deteriorate
significantly as CBRE expects leasing activity to be healthy in 2016 due to strong
demand for real estate from the tech and professional services sectors. However, in
Calgary and Edmonton, there is an estimated 7.6 million sf in office development that
is under construction which is expected to come on line in 2016 and 2017. The
incoming supply is likely to have a material impact on vacancy and rental rates over
the next few years, especially if oil prices remain depressed and absorption is weak.
42
6 January 2016
43
Industry Overview
Figure 51: Office space under construction as a percentage of current inventory – Q3/15
10.0%
8.3%
8.8%
7.5%
4.8%
London
Calgary
Waterloo
Region
Edmonton
0.6%
Vancouver
0.4%
Toronto
0.4%
Ottawa
Winnipeg
0.0%
Montreal
2.5%
2.5%
0.0%
4.0%
Halifax
3.4%
4.0%
National
5.0%
Some of the larger properties slated to be completed in the next two years are
Brookfield Place in Calgary (1.4 million sf to be completed in 2017) and Bay Adelaide
East in Toronto (1.0 million sf to be completed in 2016). Details of downtown office
developments currently under construction in Calgary and Toronto are provided in the
following table.


In downtown Calgary, there are five office development projects underway totaling
3.8 million sf. On average, the developments are 67% pre-leased, with completion
scheduled for 2016 to 2018.
In downtown Toronto, there are five office development projects underway totaling
3.6 million sf. On average, the developments are 71% pre-leased, with completion
scheduled for 2016 to 2017.
Figure 52: Summary of downtown office developments currently under construction in Calgary and Toronto
CALGARY
Project
City Centre
Eau Claire Tower
707 Fifth Street
Brookfield Place - East Tower
Telus Sky
Total/average
Developer
Cadillac Fairview
Oxford Properties
Manulife
Brookfield Properties
Telus/Allied/Westbank
GLA (sf)
810,000
615,000
564,000
1,400,000
430,000
3,819,000
Occupancy
2016
2016
2017
2017
2018
Pre-leased
87%
77%
44%
71%
36%
67%
TORONTO
Project
Bay Adelaide Centre East
Globe and Mail Centre
One York
100 Adelaide Street West
Daniels Waterfront
Total/average
Developer
Brookfield Properties
First Gulf Corporation
Menkes Developments
Oxford Properties
Daniels Capital
GLA (sf)
1,017,826
462,000
800,000
905,720
398,000
3,583,546
Occupancy
2016
2016
2016
2017
2017
Pre-leased
67%
94%
76%
86%
14%
71%
Demand for office space declined in 2015 with negative 1.7 million sf of space
absorbed nationally, in the first three quarters of 2015. Although CBRE expects
absorption to be positive in 2016, it is expected to total only 2.8 million sf,
significantly lower than the 6.8 million sf of new office space expected to come on-line
in 2016. As a result, CBRE expects the national vacancy rate to increase from 12.3%
in 2015 to 13.0% (Figure 53) in 2016.
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6 January 2016
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Industry Overview
Figure 53: National office vacancy rates (2014 – 2016E)
20.0%
18.1%
16.7%
16.2%
16.0%
12.0%
11.3%12.2%
11.0%
13.0%
12.3%
11.7%
10.7%
9.5%
10.7%
8.0%
4.0%
Calgary
Edmonton
2014
Toronto
2015E
Canada
2016E
Although there is significant industrial space under construction, we believe this is
less of a concern since much of the space is built-to-suit. As of September 30, 2015,
industrial space under construction in Calgary totaled 3.2% of current inventory (~4.1
million square feet), 3.2% in Vancouver (~5.8 million square feet), and 2.8% in
Edmonton (~3.1 million square feet). This compares to the national average of 1.3%.
Figure 54: Industrial space under construction as a percentage of current inventory – Q3/15
3.2%
3.2%
Vancouver
Calgary
4.0%
2.8%
3.0%
2.0%
1.7%
1.2%
1.3%
0.2%
0.2%
0.3%
0.3%
Montreal
Waterloo
Region
London
0.1%
Ottawa
1.0%
Edmonton
Halifax
National
Toronto
Winnipeg
0.0%
Rising unemployment due to cutbacks in the energy sector and increasing rental
apartment inventory levels are expected to weigh on rental apartment fundamentals
in Calgary and Edmonton. CBRE expects the vacancy rate in both of these markets to
increase over the next two years and rental rate growth is expected to be much slower
than the high growth rates witnessed in recent years.
However, the softness in Alberta should be mostly offset by strength in Ontario and
British Columbia, where economic growth is expected to pick up. In our view, the risk
of softening rental apartment fundamentals is more apparent for REITs/REOCs with
significant exposure to Alberta, Saskatchewan, and other energy-focused regions.
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6 January 2016
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Industry Overview
Figure 55: Rental apartment units under construction in Calgary and Edmonton
4,000
2,788
3,000
2,075
2,371
3,040
2,267
2,000
1,384
847
1,000
382 378
975
953
Dec-2012
Dec-2013
546
0
Dec-2010
Dec-2011
Calgary
Dec-2014
Nov-2015
Edmonton
Source: Canada Mortgage and Housing Corporation, Canaccord Genuity
Key concern #3: Consumer debt levels relative to disposable income are at an alltime high
Consumer debt levels have risen steadily over the past 25 years, supported by
appreciating asset prices. The current household debt-to-disposable income ratio is a
record 167% (according to Statistics Canada). Housing prices in Canada have risen
rapidly over the past several years, and a number of brokers and research firms
(including CMHC, the IMF, and Royal LePage) have recently warned of overvaluation in
the Canadian housing market.
A significant increase in the five-year GoC bond yield and/or a material correction in
housing prices could cause widespread deleveraging, which would negatively impact
consumer spending and consequently the Canadian economy.
Figure 56: The Canadian household debt-to-disposable income ratio is currently at a record high
180%
160%
140%
120%
100%
80%
60%
40%
20%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0%
Source: Statistics Canada, Canaccord Genuity
Key concern #4: Persistent low oil prices could continue to adversely impact the
Canadian economy, Alberta in particular
The oil price decline has adversely impacted the Canadian economy, particularly in the
energy-producing provinces of Alberta and Saskatchewan where there have been
45
6 January 2016
46
Industry Overview
material declines in retail sales and employment levels. One of the hardest-hit real
estate markets is the Calgary office market. Per CBRE data in mid-2015, the oil and
gas sector accounted for 8.5% of total employment and 75%-85% of downtown office
space in Calgary. Not surprisingly, the office vacancy rate has increased 450 bps and
rental rates have declined 17.0% in the first three quarters of 2015. Residential real
estate fundamentals have also been impacted, with the vacancy rate in Edmonton
and Calgary increasing year-over-year by 250 bps and 390 bps respectively, at
October 2015 (CMHC data).
A number of REITs/REOCs under our coverage have material exposure to energy
markets in Western Canada. We continue to be cautious of these REITs/REOCs. In our
view, the REITs with the shortest lease terms and greatest exposure to Alberta are
most at risk of being negatively impacted by a weaker Alberta economy as indicated in
the following chart (Figure 57).
Figure 57: Exposure to Alberta/Western Canada (percentage of NOI or assets) vs. weighted average lease term to expiry (years) as at Q3/15
100%
Percentage exposure to Alberta / Western Canada
90%
MR.UN
80%
70%
BEI.UN
MEQ
60%
50%
D.UN
40%
DIR.UN
INN.UN
FCR
AP.UN
10%
HOT.UN
0.0
CAR.UN
CSH.UN
KMP.UN
IIP.UN RUF.U 2.0
HR.UN
AAR.UN
NVU.UN
20%
0%
REF.UN
AX.UN
30%
CUF.UN
DRG.UN GRT.UN
ACR.UN 4.0
REI.UN
CRR.UN
CRT.UN
NWH.un
SRU.UN
6.0
8.0
10.0
12.0
14.0
Weighted average lease term to expiry (years)
Source: REIT/REOC reports, Canaccord Genuity



Boardwalk REIT’s portfolio of rental apartment properties is materially exposed to
Alberta, with 68% of NOI generated from the province. We expect the pace of
internal growth to turn negative in 2016 as market rental rates are trending
downwards and vacancy is on the rise. However in the near term, the impact on
FFO per unit should be partly offset by unit buybacks and interest expense savings
from refinancing maturing debt at lower interest rates.
Approximately 40% of Dream Office REIT’s NOI is generated from Western
Canada. Elevated vacancy levels and downward pressure on rental rates resulted
in same-property NOI growth turning negative in Q3/15. Given the weakening
office fundamentals across the country and especially in Calgary, we expect the
pressure on internal growth to remain and do not see a catalyst for the units in
the near term.
Artis REIT has material exposure to Alberta (35% of Q3/15 NOI). Not surprisingly,
internal growth for the Canadian portfolio was -1.6% in Q3/15. However, in our
view the REIT is better prepared to handle the current downturn in Alberta as
compared to the previous downturn following the financial crisis in 2008/2009,
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6 January 2016
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Industry Overview
due to a lower payout ratio, reduced leverage, and fewer lease expiries from the
Calgary office market.
Furthermore, strong performance from the U.S. portfolio and the strengthening
U.S. dollar have boosted the REIT’s cash flow, more than offsetting the weakness
in the Canadian portfolio and the Alberta properties in particular. As fundamentals
in its U.S. markets remain strong, we expect continued NOI growth from the REIT’s
portfolio.
47
6 January 2016
48
Industry Overview
APPENDIX – PROPERTY FUNDAMENTALS
Office
Canadian office fundamentals weakened in 2015 as growth in supply outpaced
demand. For the first three quarters of the year, demand for office space softened
and absorption totaled -1.7 million sf, compared to +3.0 million sf for full-year 2014.
This, combined with the 4.2 million sf of new space delivered to the Canadian market
(as of Q3/15), resulted in a 110 bp increase in the national vacancy rate, from 10.7%
at Q4/14 to 11.8% at Q3/15. Over the same period, rental rates have stayed flat
according to CBRE, as a 17.0% decline in the average class A net rental rate in
Calgary completely offset increases in most other major markets. We believe that net
effective rental rates have actually declined as leasing costs have been rising in some
markets.
Figure 58: National office market snapshot
5.0
15%
4.0
12%
3.0
9%
1.0
6%
0.0
(1.0)
Vacancy rate
Million square feet
2.0
3%
(2.0)
(3.0)
Construction completions (LHS)
Q2 2015
Q2 2014
Q4 2014
Q2 2013
Q4 2013
Q2 2012
Q4 2012
Q2 2011
Q4 2011
Q2 2010
Q4 2010
Q2 2009
Q4 2009
Q2 2008
Q4 2008
Q2 2007
Q4 2007
Q2 2006
Absorption (LHS)
Q4 2006
Q2 2005
Q4 2005
Q2 2004
Q4 2004
Q2 2003
Q4 2003
Q2 2002
Q4 2002
0%
Vacancy rate (RHS)
Looking ahead to 2016, CBRE expects fundamentals to remain mixed. As of Q3/15,
there was 17.5 million sf of office space under construction, which is above the 10year average of 14.7 million sf. Furthermore, many companies, especially in Alberta,
are reducing their office space footprints in an effort to be more efficient, which could
result in sustained low absorption and keep downward pressure on occupancy rates.
However, there are several bright spots in the Canadian office market. CBRE expects
office fundamentals to remain healthy in Vancouver as demand for real estate from
the tech and professional sectors should offset weakness in the resource sector. Also,
CBRE expects above-average economic growth in Atlantic Canada which should
enable office market fundamentals to improve. CBRE’s latest forecast has the
national office vacancy rate increasing 70 bps in 2016, from 12.3% at year-end 2015
to 13.0% at year-end 2016 (Figure 59).
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6 January 2016
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Industry Overview
Figure 59: CBRE’s office vacancy rate forecasts
18.0%
15.4%
15.1%
16.0%
14.0%
12.3%
12.0%
10.1%
13.0%
11.1%
10.0%
8.0%
6.0%
4.0%
Downtown vacancy rate
2013
Suburban vacancy rate
2014
2015E
Overall vacancy rate
2016E
On a geographical basis, fundamentals softened in most markets; however, the
imbalance between supply and demand has been most prevalent in the Calgary
market.


Fundamentals in Calgary have weakened significantly over the past year.
Absorption for the first three quarters of 2015 was -2.3 million sf, while a
significant 1.7 million sf of new supply was delivered to the market. As a result,
vacancy increased 450 bps from 11.0% in Q4/14 to 15.5% in Q3/15.
Furthermore, the overall office class A average net rental rate dropped 17.0%
from $28.22 psf in Q4/14 to $23.41 psf in Q3/15. In our view, the net effective
rental rate is probably much lower, and in some cases negative, as landlords are
forced to offer increased incentives to attract tenants.
According to CBRE, fundamentals will weaken further in the near term as large
development projects are completed. As of Q3/15, there was 5.5 million sf of
office space under construction (8.8% of existing supply) which is expected to
come on-line in 2016-2017. In 2016, CBRE forecasts the Calgary office vacancy
rate rising to 18.1%.
 CBRE expects further negative pressure in the downtown office market of
Calgary. Vacancy is expected to increase (CBRE data) from 16.3% in 2015 to
18.4% in 2016 as 620,000 sf of new supply is delivered to the market and
net absorption is expected to be negative.
 The suburban office market in Calgary is expected to hold up better than the
downtown market. According to CBRE, vacancy is expected to increase 20 bps
from 17.5% in 2015 to 17.7% in 2016 despite 440,000 sf of new supply
entering the market in 2016.
In Edmonton, fundamentals have also softened considerably. Absorption was
essentially flat for the first three quarters of 2015 and vacancy increased 80 bps
from 11.3% in Q4/14 to 12.1% in Q3/15, as 253,000 sf of new office space was
delivered to the market. The development pipeline is quite significant, with 2.0
million sf of office space currently under construction (8.3% of existing supply).
CBRE expects leasing activity to be soft over the next few years as tenants wait for
new office space to come on line before making long-term commitments. The
Edmonton office vacancy rate is expected to rise dramatically by 400 bps in 2016
to 16.2%.
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6 January 2016
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Industry Overview
In Toronto, though absorption was slightly positive over the first three quarters of
2015 at 185,000 sf, it was outpaced by the 1.1 million sf of new supply delivered
to the market. As a result, the vacancy rate increased 40 bps to 9.9% at Q3/15
from 9.5% at Q4/14.
For 2016, CBRE expects the vacancy rate to rise to 11.7%.

Figure 60: Overall office vacancy rate forecasts for select Canadian markets
20.0%
18.1%
16.7%
16.2%
16.0%
12.0%
11.3% 12.2%
11.0%
13.0%
12.3%
11.7%
10.7%
9.5%
10.7%
8.0%
4.0%
Calgary
Edmonton
2014
Toronto
2015E
Canada
2016E
Figure 61: Elevated levels of office construction remains a concern in Western Canada
10.0%
8.3%
8.8%
7.5%
4.8%
4.0%
London
Calgary
Waterloo
Region
Edmonton
0.6%
Vancouver
0.4%
Toronto
0.4%
Ottawa
Winnipeg
0.0%
Montreal
2.5%
2.5%
0.0%
4.0%
Halifax
3.4%
National
5.0%
Industrial
Industrial fundamentals were strong for the most part in 2015 as demand for logistics
and distribution space drove positive leasing activity. Absorption over the first three
quarters of 2015 was +8.9 million sf, despite Target’s vacancy from three distribution
centres totaling 3.1 million sf. The availability rate increased marginally from 5.4% at
Q4/14 to 5.6% at Q3/15, as 12.8 million sf in new completions outweighed the
positive absorption. Meanwhile, average net rent increased by a healthy 5.3% from
$6.06 psf at Q4/14 to $6.38 psf at Q3/15.
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6 January 2016
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Industry Overview
Figure 62: National industrial market snapshot
25
10%
20
8%
6%
10
5
4%
-
Availability rate
Million square feet
15
2%
(5)
(10)
Q2 2015
Q2 2014
Q4 2014
Q2 2013
Q4 2013
Q2 2012
Under construction (LHS)
Q4 2012
Q2 2011
Q4 2011
Q2 2010
Q4 2010
Q2 2009
Q4 2009
Q2 2008
Q4 2008
Q2 2007
Q4 2007
Q2 2006
Q4 2006
Q2 2005
Absorption (LHS)
Q4 2005
Q2 2004
Q4 2004
Q2 2003
Q4 2003
Q2 2002
Q4 2002
0%
Availability rate (RHS)
According to CBRE, industrial fundamentals are expected to remain stable in 2016,
with the availability rate forecast to be flat and net rental rates forecast to rise 2.2%.
Although the improving Canadian manufacturing outlook, weaker Canadian dollar, and
strengthening U.S. economy support the industrial sector, we have yet to see a
material improvement in fundamentals.
Figure 63: Industrial fundamentals (2014-2016E)
$6.80
5.8%
$6.59
5.4%
6.0%
5.6%
$6.45
$6.40
5.2%
$6.20
4.8%
$6.09
$6.00
Availability rate
Net rental rate ($ psf)
$6.60
5.8%
4.4%
$5.80
4.0%
2014
2015E
Net rental rate (LHS)
2016E
Availibility rate (RHS)
Retail
Retail fundamentals were challenged by the departure of Target and store closures of
a number of other retailers including Future Shop, Mexx, and Jacob. According to
CBRE, only 30-40% of the space vacated by Target was backfilled as at October 2015,
which was much lower than CBRE’s initial expectations. We highlight Cominar REIT,
H&R REIT, Morguard REIT, and RioCan REIT as REITs that had material exposure to
the Target leases.
Additionally, online sales continue to take market share away from bricks and mortar
retailers. At mid-year 2015, the retail vacancy rate was 4.0%, up 50 bps from year-end
2014 (CBRE data). Looking ahead, CBRE expects some downward pressure on rental
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6 January 2016
52
Industry Overview
rates although vacancy should not exceed 5.5%. We believe some retail REITs will
struggle to generate internal growth in the near term until the vacancies are re-filled.
Residential
According to CMHC’s Fall 2015 Rental Market Report, the national rental apartment
vacancy rate rose 50 bps year-over-year to 3.3% at October 2015 from 2.8% at
October 2014. Further, rental rate growth slowed to +2.0% year-over-year in October
2015, compared to +3.9% in the year-ago period. While fundamentals have noticeably
softened, we note that there is a clear bifurcation geographically. Residential
fundamentals in British Columbia and Ontario remain healthy, whereas fundamentals
in Alberta and Saskatchewan have deteriorated significantly.
Figure 64: The national rental apartment vacancy rate is trending higher
4.0%
3.3%
3.0%
2.7%
2.7%
2.6%
2.2%
2.0%
2.8%
2.6%
2.6%
2.2%
2.6%
2.7%
2.8%
2013
2014
2.2%
1.7%
1.6%
1.1%
1.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2015



In Vancouver, demand for rental apartments remained healthy on the back of
strong employment and positive net migration to the city. According to CMHC,
rental rates grew +4.3% year-over-year in October 2015, higher than the national
average growth rate of +2.9%. Also, the vacancy rate continued to decline and
was just 0.8% at October 2015, down 20 bps year-over-year.
In Toronto, rental market fundamentals remained stable as an increase in
population especially amongst the younger age groups that are more likely to rent,
coupled with a decrease in the affordability of house ownership, led to continued
demand for rental apartments. This was partly offset by increased supply in rental
condominiums. According to CMHC, the vacancy rate remained unchanged at
1.6% and year-over-year rental rate growth was +3.4% in October 2015.
In Alberta, rental demand has been negatively impacted by job losses in the
energy industry and lower net migration. As a result, fundamentals have softened
considerably and to a much greater extent than was initially forecast by CMHC in
its Q4/15 Housing Market Outlook:
 In Calgary, the vacancy rate increased from 1.4% at October 2014 to 5.3% at
October 2015. Rental rate growth was essentially flat year-over year at +0.8%
in October 2015, which is a significant departure from the +6.4% year-overyear growth rate observed in October 2014.
 In Edmonton, the rental apartment vacancy rate increased to 4.2% in October
2015 from 1.7% in October 2014. The pace of rental growth slowed
considerably with the average rental rate rising +2.2% year-over-year as at
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6 January 2016
53
Industry Overview


October 2015, compared to the +6.1% year-over-year growth posted in
October 2014.
In Montreal, fundamentals weakened slightly due to lower net migration as well as
stiffer competition from rental condominiums. According to CMHC, the vacancy
rate increased from 3.4% at October 2014 to 4.0% at October 2015 and rental
rates grew +1.8% over the same period. On a same-property basis, however,
rental rates remained unchanged year-over-year, suggesting that the rise in
overall rental rates was a function of the new supply.
In Halifax, the rental apartment vacancy rate unexpectedly decreased to 3.4% at
October 2015 from 3.8% in the year-ago period. Previously, CMHC had been
forecasting a rise in the vacancy rate to 4.1% due to the completion of 1,250
rental apartment units, the second largest annual increase in the past 20 years
(according to CMHC). However the market has been boosted by migratory gains as
fewer people are moving to Western Canada. Further, the aging population has
been fueling demand for rental apartments.
Rental rate growth in Halifax was +4.3% year-over-year, although this was mostly
due to newly constructed apartment buildings which carry higher rents. On a
same-property basis, the growth was a more modest +1.7%.
Figure 65: Vacancy rate trends in major markets across Canada
10.0%
9.0%
8.5%
8.0%
6.5%
6.0%
5.4%
5.3%
4.2%
4.0%
4.0%
3.4%
3.4%
3.0%
3.8%
3.4%
3.4%
1.7%
2.0%
1.0%
3.3%
2.8%
2.6%
1.6% 1.6%
1.4%
0.8%
0.0%
Vancouver
Edmonton
Calgary
Saskatoon
Regina
Toronto
Oct-14
Ottawa
Montreal
Saint John
Halifax
Canada
Oct-15
Lodging
Since hotels have substantial operating leverage, in an environment where lodging
fundamentals are improving there is an outsized positive impact on net income and
cash flows. Currently, the weak Canadian dollar is resulting in higher travel within and
to Canada, driving higher demand for accommodation. Moreover, the economic
recovery in the U.S. remains very supportive of lodging fundamentals, and key hotel
operating metrics such as occupancy, average daily rate (ADR), and revenue per
available room (RevPAR) are forecast by PwC and PKF Consulting to improve further.
Canadian lodging operating metrics forecast to surpass previous highs in 2016
According to PKF Consulting, fundamentals for the Canadian lodging sector are
forecast to improve significantly, as illustrated in Figure 66:

Occupancy is anticipated to increase to 65% in 2016, up 100 bps from 64% in
2015 and up 600 bps from a low of 58% in 2009;
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6 January 2016
54
Industry Overview
ADR is forecast to increase from $143 in 2015 to $146 in 2016 (4.4% year-overyear increase in 2015 and 2.1% year-over-year increase in 2016); and,
RevPAR is forecast to increase from $91 in 2015 to $96 in 2016 (year-over-year
increase of 3.4% in 2015 and 5.5% in 2016), up from the pre-recessionary high of
$83 in 2007 and 2008.


Figure 66: Occupancy, ADR, and RevPAR for the Canadian lodging sector
$146
$143
$137
70%
60%
$96
50%
$91
$88
$133
$83
$129
$80
65%
64%
64%
63%
62%
$127
$125
$73
$83
$83
$124
$80
$75
$117
$73
$60
$119
$100
$80
$127
$120
61%
$78
58%
60%
$128
63%
$131
$140
65%
65%
62% 63%
$77
$160
40%
30%
20%
$40
10%
$20
$0
0%
2004
2005
2006
2007
2008
2009
RevPAR (LHS)
2010
2011
2012
ADR (LHS)
2013
2014
2015F
2016F
Occupancy (RHS)
Source: PKF Consulting, Canaccord Genuity
U.S. lodging metrics to chart new highs
Lodging fundamentals in the U.S. have improved considerably since 2010, and
looking ahead, hotel fundamentals are forecast to maintain the positive trajectory in
2016, according to PwC’s Hospitality Directions U.S. (November 2015), as illustrated
in Figure 67:
Occupancy is expected to remain flat at 65.6% in 2016 (up 240 bps from a prerecession high of 63.2% in 2006), after a 120 bp increase in 2015 to 65.6% from
64.4% in 2014.
ADR is forecast to increase to US$127 in 2016, a 5.8% increase from US$120 in
2015.
RevPAR is forecast to increase to US$83 in 2016, a 5.1% increase from US$79 in
2015.



$140
61.3%
63.0%
63.2%
62.8%
59.8%
$120
60.0%
61.4%
62.2%
64.4%
65.6%
65.6%
70.0%
60.0%
$120
50.0%
$83
$79
$115
$74
$110
$68
$106
$65
$102
$61
$56
$98
$98
$54
$64
$104
$98
$66
$57
$53
$60
$62
$91
$86
$80
$107
54.6%
$100
$40
57.6%
$127
Figure 67: Occupancy, ADR, and RevPAR for the U.S. lodging sector (US$)
40.0%
30.0%
20.0%
RevPAR (LHS)
ADR (LHS)
2016F
2015F
2014
2013
2012
2011
2010
2009
2008
2007
0.0%
2006
$0
2005
10.0%
2004
$20
Occupancy (RHS)
Source: PwC Hospitality Directions U.S., November 2015, Canaccord Genuity
54
6 January 2016
55
Industry Overview
Seniors housing
Long-term fundamentals in the seniors housing sector are trending positively. Demand
from the baby boomer generation should increase over the coming years and further
drive vacancy lower. Over the last four years, the seniors population in Canada has
increased at a CAGR of +4.4% as compared to the overall population growth rate of
+1.1%. Reflecting the healthy fundamentals, over the first nine months of 2015
Chartwell Retirement Residences posted a 140 bp year-over-year increase in its
weighted average same-property occupancy rate.
Figure 68: Seniors population in Canada is growing
7.0
14.9%
6.0
5.2
5.0
5.4
15.7%
16.1%
18.0%
16.0%
5.6
5.8
14.0%
12.0%
5.0
10.0%
8.0%
4.0
6.0%
% of total population
Seniors population (milllions)
14.4%
15.3%
4.0%
3.0
2.0%
2.0
0.0%
2011
2012
Seniors population (65+)
2013
2014
2015
Seniors population (% of total population)
Source: Statistics Canada, Canaccord Genuity
Not surprisingly, there has been increased investment interest in the seniors housing
sector with some significant transactions occurring in 2015, including:
The sale of Regal Lifestyle Communities Inc. to Welltower Inc. and Revera, Inc. for
$764 million (6.1% cap rate);

The sale of Amica Mature Lifestyles Inc. to Baybridge Seniors Housing Inc. for
$578 million; and,

Over $587 million of announced or completed acquisitions of seniors housing
assets by Chartwell Retirement Residences since the beginning of Q3/15.
According to CBRE, cap rates for high quality seniors housing assets declined by 75100 bps in 2015 with average cap rates currently in the sub-7% range.

55
6 January 2016
56
Industry Overview
Appendix: Important Disclosures
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Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of
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with a subject company, public appearances and trading securities held by a research analyst account.
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Distribution of Ratings:
Global Stock Ratings (as of 01/06/16)
Rating
Coverage Universe
IB Clients
#
%
%
Buy
585
62.63%
31.79%
Hold
261
27.94%
13.03%
Sell
30
3.21%
3.33%
Speculative Buy
58
6.21%
58.62%
934*
100.0%
*Total includes stocks that are Under Review
Canaccord Genuity Ratings System
BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.
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6 January 2016
57
Industry Overview
authoring analysts have not received, and will not receive, compensation that is directly based upon or linked to one or more specific
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6 January 2016
58
Industry Overview
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6 January 2016
59

2016 REIT outlook - The Globe and Mail

Transcription

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