Trader’s Narrative

Just a few days ago Telus announced that they were converting their legal structure from a corporate one to an income trust. This was yet another of a string of smart moves by Telus’ management. Their $800 million tax loss will be all used up and by converting to a trust they transfer the tax burden from themselves to their shareholders.

This means that Telus will have to continue to execute without fail since fiscal discipline will be imposed by their comittment to distribute much of their free cashflow to shareholders. Contrast this with Bell Canada’s bumbling management that has nuked billions of shareholder equity over the last decade and their dogged refusal to conver to an income trust.

Telus will become the largest income trust and by default will have to be included in all major trust indexes, mutual funds and managed accounts. People running money have will have no choice but to own this. So it doesn’t take a lot of analysis to conclude that that amount of institutional buying will propel Telus higher.

After the close of the market on August 30th, right out of the blue Summit announced that it was being taken over by ING for their ING Industrial REIT Fund (Australia). The buyout offer is for an 18% premium to the market close which is quite respectable. ING is buying the whole thing but will only keep half and sell the other half to other institutional holders.

So what does this mean? For one, the real estate market (especially REITs) is becoming more and more global. Money flows to where the opportunities are regardless of national or geographic boundaries. Second, it means that Canadian REITs are in play since they are cheap. This is not really news to me since I considered the small and shallow nature of our REIT markets to be a handicap when it came to valuation. And lastly, it means that when there is a foreign buyer involved, people on the inside can actually manage to keep their yaps shut.

To see what I mean by the last point, check out the price action prior to the announcement (purple oval). There was no discernable pattern, either in price or volume, that there was a deal in the works. Summit was trading as it usually does - rather sluggishly. Tragically this is an all too rare occurance in Canada where almost everyone and their uncle know about a deal before it goes down.

Since the last time I wrote about them, Canadian REITs have come down much closer to their net asset value:

Here’s a quick overview of the sector breadth: 47% are above their 10 day moving average (MA), while 20% are above their 50 and 200 MA. Prices have on average bounced up quite a bit on the shorter term. But breadth is still quite oversold in the longer term.

The chart of the S&P/TSX Capped REIT Index is very similar to the $4 billion bellwether, RioCan. And as you can see, RioCan is in a Weinsteinian “Stage 3″. The 200 day moving average (blue line) has flattened out and is just starting to point down. As well, price has fallen under it and has formed successive lower highs and lower lows:

The only question is, will we see a repeat of April 2004? Back then, it also seemed like a “Stage 3″ topping formation but price quickly rebounded and broke out to the upside again. There is a possibility of that repeating because RioCan has strong support at the $20-19 range. And if the REIT index does head up again, it needs large constituents like RioCan to lead the charge.

Taking a look at some individual REITs in the sector, here are some that look interesting to me:

• IPC US Commercial REIT (IUR.un) is approaching multi-year lows and currently yields 9.2%
• Lakeview (LHR.un) is a tiny REIT with a high relative strength and a 13.1% yield
• Morguard (MRT.un) is the favourite of RBC analysts and has an 8.6% yield
• If you’re a bargain hunter, you might be tempted by Primaris (PMZ.un) but beware as it is in a clear downtrend and it only yields 7.5%
• Public Storage (PUB) is at long term support at $20 and yields 9%
• Retirement Residences REIT (RRR.un) might be making a double bottom at $7.25 and yields 11%

If you aren’t a bargain hunter and want to pick among the high relative strength REITs, take a look at Boardwalk (BEI.un), Dundee (D.un), Allied Properties (AP.un), Northern Property (NPR.un), CHIP REIT (HOT.un), and Canadian REIT (REF.un).

“Teranet is a leading provider of land-based information products and services. Teranet operates in Ontario and provides access to the Ontario Electronic Land Registration System (”ELRS”). This enables customers to conduct electronic registrations as well as title and writ searches relating to real property. Teranet has the exclusive right to access the data in and operate the ELRS until March 31, 2017.”

With its valuable and cozy partnership with the Ontario government, Teranet has one foot in the private sector and one foot in the public sector. Today’s IPO and the looming expiry of their monopoly on the horizon nudge the company towards becoming a completely private enterprise.

The timing of the IPO though wasn’t that smart. However, it provides a good litmus test. If Teranet shows strength in such a horrible market, that would be most impressive. The massive size of Teranet’s IPO raises the likelihood that it will be added shortly to the S&P/TSX income trust index . If it does, it will compell institutions and index funds to buy it, pushing the price up significantly. Watch the price action in the coming days and weeks to see if the smart money has an inside line on this.

Until then, here’s today’s intraday action:

Notice that it opened below the IPO price of $10 a unit - but on the plus side, it did trade higher and closed at the day’s high. The intraday action reminds me of MasterCard’s (contraction, expansion and all that jazz).

The North West Company Inc. operates small-scale retail stores in remote communities and larger regional centres under the Northern banner and other banners. Stores offer perishable and non-perishable foods, general household merchandise, small watercraft, snowmobiles, and services such as automated teller machines and gasoline sales. The Company also engages in fur marketing and the marketing of Inuit art.

I really like this Canadian listed company because they have tremendous potential to grow as the northern territories of Canada continue to develop and attract more and more people. The above chart doesn’t do them justice since they are a trust (not a corporation) and pay a regular quarterly distribution (akin to dividends). Their first quarterly distribution was in 1998 for 25 cents and their latest one (payable July 15th) is for $0.54

Except for the October 2005 dip (even great yielding, solid companies are not immune to a heavy market selloff), you can see a beautiful, stair stepping pattern of higher highs and higher lows.