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Inside the Market’s roundup of some of today’s key analyst actions

Canadian office property market fundamentals are "relatively stable" outside of Alberta, according to Industrial Alliance Securities analyst Brad Sturges.

"Certain Canadian property markets such as Toronto’s CBD [central business district] have benefitted in recent years from strong population and job growth, partly resulting from commercial and residential migration back into the city from the suburbs," said Mr. Sturges in a research report released Thursday. "This has resulted in increased office leasing demand for high-quality, well-located office space in some of Canada’s urban primary office real estate markets.

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"Reflecting tight leasing conditions in certain Canadian office property markets such as Toronto and Vancouver, landlords have leverage to seek 10-year lease terms with peak rent rates, while office subleases are being assumed by landlords who believe hat they can be easily released at similar or higher rents psf [per square foot]. By geography, Toronto and Vancouver exhibit the lowest average vacancy rates combined with strong rent growth in the past five years. While earlier in the cycle, Montreal’s office real estate market has been exhibiting signs of improvements in recent quarters. However, ongoing construction activity in Montreal may limit further reductions in average vacancy rates and potential rent growth in the property market. Finally, while the Alberta office property market has shown early signs of stabilization, the operating environment for many landlords in Calgary and Edmonton remain quite challenging, which is expected to continue for the foreseeable future."

In the report, Mr. Sturges initiated coverage of three Canadian office REITs:

Allied Properties REIT (AP.UN-T) with a “buy” rating and $52 target. The average target on the Street is $50.68, according to Thomson Reuters Eikon data.

Analyst: "Allied’s senior management team has established a compelling long-term track record of creating value for the REIT’s unitholders as exhibited by the REIT’s total return performance and stellar NAV [net asset value] per unit and AFFO [adjusted funds from operations] per unit growth achieved to date. As one of Canada’s largest and most liquid publicly listed REITs, Allied may benefit from increased global investment interest, which may provide the REIT with ample access to capital at a relatively low average cost to pursue its various growth plans."

Slate Office REIT (SOT.UN-T) with a “buy” rating and $7 target. The average is $6.68.

Analyst: "SOT’s units have materially sold off in recent months, mainly due to increasing interest costs in a rising rate environment in 2018, and the REIT’s decision to adjust its monthly distribution rate in order to strategically retain more cash flow. However, the REIT’s near-term headwinds may dissipate in a muted interest rate environment in 2019 YTD. Based on expectations for improving financial leverage and AFFO payout ratios, SOT may be better positioned for longer-term growth. While SOT’s near-term P/AFFO multiple valuation may remain constrained due to a possible investor base churn, SOT’s deep discount valuation provides an attractive entry point for long-term, value investors."

True North Commercial REIT (TNT.UN-T) with a “hold” rating and $6.75 target, which matches the current consensus.

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Analyst: “TNC provides attractive pure-play exposure to the Canadian office property sector, while generating stable cash flows with moderate growth prospects that are backed by a diversified portfolio of credit-worthy tenants. Through acquisition and capital recycling activities, the REIT may further enhance its office property portfolio composition. However, TNC’s elevated 2019 estimated AFFO payout ratio may constrain the REIT’s near-term P/AFFO multiple valuation.”

Noting there are 11 investable REITs in the sector, Mr. Sturges said he prefers options with "above-average exposure to the ‘landlord friendly’ Toronto CBD office real estate market."

“Notably, all four publicly traded pure-play Canadian office REITs including Dream Office [D-UN-T] have significant exposure to the GTA, with Allied owning the most urban-weighted portfolio in the group,” he said. “For investors seeking Canadian office property exposure, we recommend Allied, which offers the greatest unit liquidity, and is well positioned to generate above-average AFFO/unit and NAV/unit growth in the coming years in our view. By comparison, SOT offers cross-border office real estate exposure at a deep discount valuation, providing an attractive entry point for longterm value-oriented investors. While we expect more limited near-term price appreciation potential, TNC may attract income-oriented investors seeking an attractive yield, backed by stable cash flows that are generated by credit-quality tenants.”


National Bank Financial analyst Michael Parkin thinks earnings misses and beats, rather than positive business updates, will continue to drive share price movement for Canadian precious metals miners through the first quarter.

In a research note, Mr. Parkin raised his rating for OceanaGold Corp. (OGC-T) to “outperform” from “sector perform” based on its current valuation. His target for the stock is $5, which sits 38 cents below the consensus.

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He thinks the company should have an improved second half of the year, due largely to the ramp-up of its Haile gold mine in South Carolina, which will benefit from a newly installed fine grinding circuit and a replacement of the mining fleet should help lower unit mining costs and increase performance.

Mr. Parkin lowered Yamana Gold Inc. (YRI-T) to “sector perform” from “outperform” with a target of $3.75, falling from $5. The average is $4.43.

He said the $1-billion sale of its Chapada mine to Lundin Mining Corp. reduces financial leverage concerns, changes its free cash flow profile and potentially raises M&A risk.

The analyst now sees Yamana as a pure precious metals play with an improved political risk profile.


Morgan Stanley (MS-N) had a “strong” first quarter, however its stock is now fairly valued, said Citi analyst Keith Horowitz.

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"MS is now up 22 per cent year-to-date, outperforming the [The KBW Bank Index] by 500 basis points," he said. "After a 2.6-per-cent increase on earnings [Wednesday], the stock is now in line with our $48 target price. Though we believe MS has very high quality franchises and has the potential to continue to gain market share, we’d rather be on the sidelines in the near-term. We’re downgrading the stock to Neutral as a result and maintain our $48 target."

Moving the stock to "neutral" from "buy," Mr. Horowitz's US$48 target sits the US$53.27 consensus.


On the heels of “softer” first-quarter delivery results, Citi analyst Itay Michaeli lowered his financial projections for Tesla Inc. (TSLA-Q) through 2021 based on lower volume assumptions.

Ahead of its April 22 Autonomy Investor Day, Mr. Michaeli said he's now projecting an adjusted earnings per share loss of 64 US cents for the first quarter with free cash flow burn of US$0.4-billion.

His EPS forecast for 2019, 2020 and 2021 slipped to US$2.28, US$5.20 and US$14.75, respectively, from US$6.38, US$12.52 and US$17.28.

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Pointing to lower volume estimates and a “narrower” cash cushion, his target for Tesla shares fell to US$238 from US$273, keeping a “sell/high risk” rating. The consensus on the Street is US$309.27.

“Since our initial preview, Tesla has publicly shared additional commentary ahead of the Investor Day: (a) Suggestions of major FSD software upgrades as soon as this year or next year at the latest, apparently capable of far higher levels of autonomy (no apparent DMS); (b) Renewed expectation for a Tesla shared AV network, which the company hasn’t discussed in some time; (c) Implication that a Tesla shared AV network will be operational a few years from now. Bears will likely argue that Tesla is attempting to pivot its story after softer Q1 demand, while setting unrealistic AV expectations,” he said. “Bulls will likely argue that the AV-day could redefine Tesla’s role in this race and/or boost vehicle demand. Needless to say, the event will be important. On the latest Tesla disclosures, we’d be incrementally focused on the following questions/topics: (1) More detail around expected L4 domains (urban/highway/rural) & advanced sensing capabilities (free space, context, speed/range, weather, alerts vs. braking), particularly within a future shared AV network which introduces pickups/drop-offs; (2) Approach to training driving policy such as Tesla’s use of real-world data (pros & cons of behavioral cloning) + simulation, both pre & post FSD; (3) The strategy around the Tesla network from a consumer-owned vs. dedicated fleet perspective.”


Investor “skepticism” around changes to Yelp Inc.'s (YELP-N) advertising business and a recent pullback in price provides an attractive entry point, said BMO Nesbitt Burns analyst Daniel Salmon.

He initiated coverage of the California-based tech company with an "outperform" rating and US$45 target, which exceeds the current consensus of US$39.32.

"While we don't expect Yelp to achieve its 2023 financial targets, we are above consensus and see revenue growth accelerating throughout 2019 and into 2020, supporting multiple expansion," said Mr. Salmon.

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“We also believe risk-reward skews positive at current levels; our upside scenario sees a 69-per-cent return versus a loss of 30 per cent in our downside scenario.”


In other analyst actions:

TD Securities analyst Menno Hulshof raised Husky Energy Inc. (HSE-T) to “buy” from “hold” with an $18 target, up from $17. The average is $16.50.

Mr. Hulshof cut Vermilion Energy Inc. (VET-T) to “hold” from “buy.”

TD’s Aaron Bilkoski upgraded Peyto Exploration & Development Corp. (PEY-T) to “buy” from “hold” with a $9.50 target, rising from $8.50. The average is $9.13.

National Bank Financial analyst Zachary Evershed downgraded Cascades Inc. (CAS-T) to “sector perform” from “outperform” with a $9 target, down from $11. The average on the Street is $10.67.

With files from Reuters

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