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Canadian REIT Review: Oversold Is Nothing at Trader’s Narrative





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I wanted to write about this during the holiday season but it being the holidays it got pushed to the new year.

Canadian REITs as a group were pummeled beyond belief during this bear market. Personally I’m surprised to see this because generally speaking they are a solid business model. Not over leveraged, diversified and recession-proof (for the most part).

There is no way that their market valuation should be cut in half - or more! But it goes to the heart of this bear market that even the highest quality securities are being sold off to raise cash, meet margin calls, de-leverage and reduce risk in portfolios.

By now this market dislocation is obvious as Canadian REIT prices have screamed higher in the past few weeks - some rising 25% and others up to 50%. I think they will probably give up some of that increase and take a breather. But considering how extremely oversold they got, they continue to present a very compelling value here.

Here are the 5 largest REITs by capitalization:

  • Riocan REIT — (REI.un)
  • H&R REIT — (HR.un)
  • Boardwalk REIT — (BEI.un)
  • Canadian REIT — (REF.un)
  • Calloway REIT — (CWT.un)

H&R REIT was under a dark cloud and got taken to the back of the shed in 2008. Their share price fell from a high of $27 in 2007 and a high of $21 in 2008 to just $4.45. Since then doubts about their financial stability have been removed by their announcement of a distribution cut and debenture sale. HR REIT shares have gained almost 100%.

Here’s a chart of Riocan REIT, the largest in Canada. Over the holidays it reached a yield of just over 10%. That’s equivalent to levels which we last saw in early 2001.

Riocan REIT long term chart and yield Jan 2009

At that time, the Bank of Canada interest rate was 5.5%. Right now, the interest rate is 1.5%.

That’s significant to bring into the picture because it shows that 8 years ago, an average investor had alternatives to Riocan REIT which yielded much higher returns than right now.

This just brings home how irrational these valuation levels are for Canadian REITs right now.

Insiders Buying
As you might expect, insiders are not oblivious to this. They have been actively buying shares of their companies even as they have continued to fall.

For example, Calloway Real Estate Investment Trust trustee Mitchell Goldhar bought 37,100 trust units through CWT Investments Ltd at prices ranging from $8.60 to $9.75 each on Dec. 4 through Dec. 10, 2008, bringing these total holdings to 10,889,413 shares.

And Riocan REIT chief financial officer Frederic Waks bought 5,400 trust units at $13.22 each on Dec. 4, 2008, bringing these total holdings to 200,956 shares.

Although you may have missed the extremes, as long as you’re smart about it and don’t chase the price higher, I don’t think you’ve completely missed the buying opportunity here.

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9 Responses to “Canadian REIT Review: Oversold Is Nothing”  

  1. 1 Pej

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    Hum… No reason for the price to be cut in half?
    With their assets collapsing in value (real estate) and a current PER of around 17-20, I wouldn’t call them neither a bargain nor a safe investment.

    On a similar area, I am invested in Canadian oil trusts: PGH, AAV, HTE, PWE

  2. 2 Lotus

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    yeah,but assets did not fall 1./2 or even close! and they continueing to pay monthly with safe distribtion because they are not high leveraged

  3. 3 Pej

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    Assets (real estate) WILL fall at least 50%, markets are forward looking. Real estate is overvalued by about 50% to 60%.
    Distributions are not save, once profit fall because of lower rental income or higher vacancy or both.
    And finally, I haven’t investigated yet, but the Canadian trusts tax benefits are going to disappear by 2011, this impacts energy trusts, so maybe REITs as well.
    I am not saying not to buy, I am just saying that it could not be such a bargain after all.

  4. 4 Mr Risk

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    I’ve been wondering…

    It’s a funny thing for executives. Keeping in cash these days nets you no return. Someone else’s stock or the market is scary. Commodities dropped off the map. Bonds are risky to buy if interest rates rise from their historic lows. Real estate scares a lot of people because there is no clear sign of bottom across the world.

    You want to buy something you know. Your own company. Especially if it’s the lowest price and valuation you’ve seen in a very long time. And of course, you are positive you can survive the economic and build back value during the eventual upswing. Even for the yield alone when it approaches or exceeds double digits. What else is a better investment for insiders?

  5. 5 Lou Stouch

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    An ETF of the Canadian REITs would be something I would take a look at. I did a quick search and came up with an iShares symbol XRE.

    Can anyone confirm I have the right symbol?

  6. 6 Babak

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    Lou, XRE is the only ETF that I know of but there are other ways of getting basket exposure. For example, there is the split share REIT SOT.un (and SOT.PR.A). If you’re not sure what a split share is, make sure you read the prospectus so you know exactly what you’re buying. There is also the Sentry Select REIT fund which is a mutual fund.

  7. 7 nuke

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    non of u guys are even looking at these balance sheets and cash flow statements are you… riocan loaded up on close to 600 million dollars in new assets in the middle of the crash at extremely undervalued prices.. the dividend price is also misleading because the first couple years show quarterly distributions of .22/4 => .05 monthly now .1125 with effective raises every 10 months.. more than doubling the dividend sine 98 also if u look at the specific properties and contract styles it owns ull realize its not about that stupid PE.. its about the facts.. riocan leases to walmart/staples/drugstore/ tons of other big names… all the properties at near 100% filled excpet for one 60% filled mall 2 in the 80%’s rest are 95% filled to 100% filled with 100% being the majority. This CA:REIT will make mad money coming into 2010-2011 its not US REIT its canadian USA debt is OUT OF CONTROL debt v gpd nearing greece levels and canadian is much lower with plans to reduce debt steadily over the next few years.. boosting economic activity in the region…

    and the markets are not forward looking.. they are all emotion based. if you think they are forward looking then why were houses selling at 300k when they were probably only worth 220K because of fear.. fear that you will not be able to purchase in the future..

  8. 8 Babak

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    nuke, and don’t forget when the 2011 income trust rule comes into effect a lot of that yield seeking capital will have to go somewhere ;)

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