Some smaller REITs are well-positioned to be taken over.Alexei Popkov/Getty Images/iStockphoto
Inside the Market's roundup of some of today's key analyst actions.
CIBC World Markets today slashed its price targets across the board on Canadian real estate investment trusts, but it came with an uplifting message for REIT investors: the recent selloff was overdone and a near-term recovery is on the way.
The CIBC analysts believe the market went overboard in factoring in spiking interest rates when the U.S. Federal Reserve last month suggested it may soon start tapering its $85-billion (U.S.) a month in bond purchases, also known as quantitative easing.
"While we expect improving economic conditions and higher interest rates, we expect a near-term recovery in REIT prices," the CIBC analysts, which include Alex Avery and Brad Sturges, said in a research note.
Nevertheless, CIBC reduced its price targets to "reflect our view that some of the tailwinds that Canadian REITs have enjoyed for several years are beginning to diminish, moderating Canadian REIT funds from operations, adjusted funds from operations and net asset value growth prospects, and driving modestly lower valuations."
The analysts dropped their price targets by an average of 5 per cent, bringing them largely in line with net asset values. Net asset value is a measurement of a firm's assets minus its liabilities to provide an estimate of underlying value.
At the same time, CIBC raised its 12– to 18-month average total return forecasts from a range of 5 per cent to 10 per cent to a range of 15 per cent to 20 per cent.
The S&P/TSX capped REIT index is down just over 10 per cent since May 28. So even though CIBC cut its price targets by an average of 5 per cent, the revised estimates leave the REITs with an improved outlook on returns if bought now, given the severity of the recent pullback. Distribution yields also move opposite to unit prices, so the higher payouts will also help boost total returns.
"We continue to recommend investors carry a 'market weight' position in the REIT sector, with our increased 12 - to 18-month total return expectation of 15 per cent to 20 per cent reflecting mainly the recent sharp correction in REIT prices, of which similar corrections occurred in several other sectors," he said.
You can click here to see a full breakdown of CIBC's revised price targets and total return estimates for the REITs it covers.
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Darcy Keith