National Bank cuts ratings on two major REITs
) to “sector perform” from “outperform”, citing continued weak occupancy rates in the office real estate sector. While declining interest rates will be helpful, he notes that it will come with heightened economic risks.“We now rate all office names sector perform given continued fundamental weakness and uncertainty around timing of an inflection,” he said in a note to clients. Sector perform ratings are the equivalent of a hold.
“That said, valuation today doesn’t provide a big enough risk premium buffer to offset potential negative catalysts. We could be wrong if management is more proactive in sourcing value closer to book on the disposition front in a more meaningful quantum,” he said. Primaris is primarily an enclosed mall operator and the downgrade mostly reflects a weak consumer. He said this economic backdrop has made him increasingly defensive, as consumers are stretched and high interest rates may continue to dampen spending.
“In our view, there are limited catalysts in the short term; however, if the portfolio is resilient and sees continued outperformance in operating metrics, trading may react favourably. Strong pricing on a potential sale of Dufferin Mall or other assets could also happen, although broadly speaking, we think management is inclined to grow the portfolio,” the analyst concluded.), moving to “sector perform” from “outperform.” His price target was unchanged at US$12.50.
He suspects the new rating, which is the equivalent of a hold, will eventually return to an outperform. “We view this as a temporary move as portfolio performance is likely to inflect as supply comes down, we are just uncertain on the timing and economic conditions are deteriorating, not improving,” he said.
“In light of this improving backdrop and a mid-7% implied cap rate we think the current entry point looks attractive for investors looking to add a industrial exposure,” he said.
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