A selloff in the Canadian real estate investment trust sector has sent the market valuations of some trusts below their net asset values, possibly providing a buying opportunity for investors looking for blue-chip bargains.
Rising interest rates and the spillover from a recent drop in more richly valued U.S. REITs has depressed the trading price of high-quality Canadian REITs, in some cases to below the net value of their assets. This has created some "exceptional values" among the sector's top names, such as RioCan REIT, H&R REIT and Calloway REIT, Rossa O'Reilly, analyst at CIBC World Markets, said in a research note.
"Real estate industry fundamentals remain strong and we expect that long-term interest rates may be close to plateauing. Property yields are still attractive and current prices for REITs represent attractive buying opportunities in our opinion," Mr. O'Reilly said.
In the past five years Canadian REITs have tended to trade well above their net asset values. That has now shifted to many trading at a slight discount as investors worry that rising interest rates could inflate costs, and therefore increase the length of time it takes for the cash flow a property generates to cover its purchase price.
All but two of the 13 firms listed on the S&P/TSX capped REIT index dropped yesterday, with Canadian REIT (CREIT) dropping 4 per cent and Calloway falling 3 per cent. The sector is down 11 per cent from its year-to-date high reached on Feb. 23.
Part of the selling may be the result of U.S. investors exiting some of their Canadian positions to stock up on more heavily discounted U.S. REITs, said Michael Smith, an analyst at National Bank Financial. So far this year, the S&P REIT index in the United States has dropped 19 per cent from its 2007 high reached on Feb. 7.
Mr. Smith noted that the selling pattern tends to cycle through different names in the trust sector on different days, often creating mid-session buying opportunities that evaporate by the end of the trading day.
Investors should still exercise caution in this sector, however, since trust units could fall further as bond yields rise and the takeover premiums built into some trust names deflate, Scotia Capital analysts Himalaya Jain and Mario Saric said in a research note. Continued demand for high-quality real estate assets should help limit these risks, they added. Mr. Jain and Mr. Saric flagged Calloway REIT, Allied Properties REIT, Artis REIT and CHIP REIT as their top picks.
PreferredsOnline
Securities and research to generate yield and income: preferred stocks, REITs, MLPs, royalty trusts
