Trader’s Narrative

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.

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.