BMO analyst’s top picks in industrial REITs

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

Positive returns from industrial REITs have bucked the broader trend of weaker real estate returns.

BMO analyst John Kim provides his top related picks in a Wednesday report,

“The Industrial REIT sector continues to benefit from visible growth, with sector-leading 2023 estimated SSNOI [same store net operating income] growth of 9.1 per cent, 67-per-cent mark-to-market (PLD/REXR), and 2023 market rental growth projections of 10 per cent plus. While the sector is facing peak supply growth this year (up 3.1 per cent), CoStar expects a steep decline (down 53 per cent) in 2024, to 1.4 per cent. However, industrial REITs are not immune from recessionary risks; CoStar recently reduced its ‘23 net absorption forecast by 41 per cent. We maintain Outperform ratings on PLD, REXR, and STAG, with a preference towards higher FFOps [funds from operations per share] growth. Our price targets indicate a 17-per-cent return from current levels”.

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RB Advisors highlights the extreme narrowness of the current market,

“We’ve described the past several years’ stock market as a seesaw in which the “market” was the fulcrum of the seesaw. On one side of the seesaw sit the highly speculative growth sectors of the market (Technology, Communications, and Consumer Discretionary) coupled with innovation, disruption, and meme stocks. On the other side of the seesaw, sit virtually everything else in the global equity markets… A simple method of measuring market breadth is the percent of the S&P 500 companies that outperform the index. Historically, improving economic conditions broaden the market as more companies benefit from the improving economy. As cycles mature, however, markets tend to become more “Darwinistic,” (i.e., survival of the fittest) because fewer companies can maintain their growth as the economy weakens…2023 has been the narrowest equity market since the financial crisis. Only 28% of the S&P 500® companies have outperformed the index so far during 2023 … the current performance difference between the Nasdaq-100® and the Russell 2000 indices is currently mimicking that seen during the most extreme points of the Technology Bubble in 1999″.

“The seesaw becomes extreme” – RB Advisors

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Commodity prices continue to struggle against weaker than expected Chinese demand,

“Base metal equities continued their downward trend last week with volatility driven by demand uncertainty and a strengthening dollar before rebounding to start this week on a U.S. debt ceiling resolution (Reuters). Chinese economic data continues to point to a weak demand environment with industrial firms posting an 18-per-cent decline in profits year-over-year in April. Zinc prices were a notable underperformer over the week given exposure to a languishing construction market in China, as prices reached the lowest level since July 2020 (Reuters). The weaker demand stems from a housing crisis in China spurred by oversupply and debt-riddled developers, as the building market searches for equilibrium (New York Times). This has resulted in a follow-on effect in inventories, specifically in zinc, which risen fivefold since February (Reuters). • Base Metals & Bulk Commodities: Copper was down 1.7 per cent the past week to $3.67/lb. Copper exchange inventories declined 4.8 per cent week-over-week, while net long/short copper positioning moved to -29.8k net short from -32.6k net short last week. Zinc was down 6.9 per cent week-over-week to $1.05/lb. Zinc exchange inventories increased 20.1 per cent week-over-week. Nickel was down 0.1 per cent over the week to $9.73/lb. Nickel exchange inventories decreased 1.2 per cent week-over-week. Iron ore was down 2.3 per cent week-over-week to $102.45/dmt while met coal decreased 0.4 per cent to $222/t”

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Diversion: “Lawyer cited 6 fake cases made up by ChatGPT; judge calls it “unprecedented”” – Ars Technica

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