RBC Capital bullish on Canadian REITs for 2025, sees US valuations stretched

On Friday, RBC Capital released its '2025 Global Real Estate Outlook,' which provides a comprehensive analysis of the real estate investment trust (REIT) sector in Canada and the United States. The report indicates a divergence in performance between Canadian and US REITs in 2024, with the MSCI US REIT index significantly outpacing the S&P/TSX REIT index. The US market experienced a 13% year-to-date (YTD) gain as of December 12, 2024, compared to a mere 1% for its Canadian counterpart.

Despite the underperformance of Canadian REITs relative to the US market, RBC Capital views the Canadian sector as increasingly attractive due to recent valuation pullbacks. In contrast, US REIT valuations appear extended, especially when considering the trajectory of bond yields and interest rates. The report projects US REITs to achieve flat to slightly positive total returns in 2025, likely trailing behind the broader US equity markets.

The outlook for 2025 suggests varying levels of growth across different subsectors. Canadian seniors housing, US healthcare, US net lease, and US manufactured housing are expected to have stronger relative outlooks. Meanwhile, sectors such as Canadian industrial, Canadian and US residential, Canadian retail, and Canadian self-storage are anticipated to face moderate or neutral growth. Sectors like Canadian office, US self-storage, and US industrial are approached with more caution.

RBC Capital's analysis shows that Canadian REIT valuations are more appealing, trading at 15 times the estimated 2025 adjusted funds from operations (AFFO), with a 7.1% implied capitalization rate, and 19% below net asset value (NAV). In contrast, US REITs trade at 17 times estimated 2025 AFFO, with a 6.4% implied cap rate, and at NAV parity. The firm notes that the US REIT funds from operations (FFO) yield to BBB bond yield spread is below the 7-year average, suggesting tighter valuations.

RBC Capital has compiled a basket of REITs with 'Outperform' ratings for 2025. This selection is based on sector preferences and valuation considerations, including American Healthcare REIT (NYSE:AHR), Boardwalk REIT (TSX:BEI_u) (TSX:BEI.UN), Chartwell Retirement Residences (TSX:CSH.UN), Dream Industrial (TSX:DIR.UN), Essex Property Trust (NYSE:NYSE:ESS), First Industrial (NYSE:FR), Gaming & Leisure (NASDAQ:GLPI), Healthpeak (NYSE:DOC), and Killam Apartment (TSX:KMP.UN). This basket reflects the firm's confidence in these picks amidst the current market dynamics.

In other recent news, Gaming and Leisure (NASDAQ:GLPI) Properties Inc. reported robust third-quarter performance in 2024, planning nearly $2 billion in development activity for the coming year. The company's total income from real estate increased due to acquisitions, while operating expenses rose due to a provision for credit losses.

JPMorgan shifted its stance on Gaming and Leisure Properties Inc., upgrading its stock rating from Neutral to Overweight and increased the price target for the company's shares to $54.00.

The firm highlighted reasons such as the company's attractive dividend yield, rent escalators, and recent mergers and acquisitions activities. Deutsche Bank (ETR:DBKGn) also upgraded Gaming and Leisure from Hold to Buy, setting a new price target of $54.00.

Stifel raised its price target for Gaming and Leisure to $57.50, maintaining its Buy rating. JMP Securities sustained its Market Outperform rating on the company, maintaining a $55.00 price target. The company's credit facility was also expanded, increasing its revolving commitments from $1.75 billion to $2.09 billion and extending the maturity date to December 2, 2028.

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