Calgary Exposure Is The Biggest Risk For REITs: Here's Why

• It has been a mixed bag for international REITs so far this earnings season.
• The U.S. market was a point of strength in Q3, but the Calgary market was particularly weak.
• The effects of the strong El Nino could provide a margin boost for REITs throughout the winter.

With just over half of the firm’s covered REITs already reporting Q3 earnings, BMO Capital Markets analyst Heather Kirk released a new report that includes her thoughts on REIT earnings so far. It has been a mixed earnings season for REITs up to this point, with plenty of bright spots and disappointments.

The good news and the bad news
So far, of BMO’s covered REITs, seven have beat earnings expectations, three have missed and five have been mostly in-line. Among the firm’s U.S.-listed REITS, American Campus Communities, Inc. ACC was a particular bright spot so far this earnings season.

Kirk notes that commercial real estate will continue to face growth headwinds, particularly in Western markets. However, she singles out the Calgary market as “the biggest source of forecast risk” when it comes to the potential for downward REIT earnings revisions.

U.S. remains strong
Kirk notes that international REITs with exposure to the U.S. market have outperformed their peers in recent months on the strength of organic U.S. growth. “The Super El Nino is expected to keep temperatures milder than normal through the winter and may help multi-family and seniors housing REIT margins in Q4/15 and Q1/16,” she adds.

Top picks
The report names Brookfield Canada Office Properties BOXC as BMO’s top U.S.-listed REIT. BMO recently upgraded the REIT to Outperform and sees strength in the form’s exposure to the Toronto market. In addition, BMO believes that Brookfield could use the proceeds from asset sales for additional unit buybacks.

Disclosure: the author holds no position in the stocks mentioned.