Another kind of bargain in the consumer retail sector

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The Stock

Primaris Retail Real Estate Investment Trust

Yesterday's closing price

$17.10

Trend

The composition of the income trust sector trading on the Toronto Stock Exchange is changing, as many TSX income trusts are delisting or converting to corporations in advance of changes in income trust tax treatment coming into effect at the beginning of 2011.

However, Brookfield Properties Corp.'s recent announcement that it plans to convert subsidiary BPO Properties Ltd. to a real estate investment trust (REIT) reminds us that income trusts remain as a preferred structure for commercial real estate investors.

Trading volume last week was strong in a number of REITs as some of them hit new highs before finishing the week slightly in the red. Many investors have put themselves squarely in the middle of a solidly bullish trend for real estate stocks and trust units, and continue to buff their exposure.

The Trade

Many Canadians go shopping at the mall, but smart investors can take a landlord's view of the upswing in the consumer retail sector - something evident in the bullish trends of many retail store stocks. Primaris Retail REIT's portfolio of shopping malls is full of familiar names for middle-class Canadian consumers, with 28 properties and more than 10 million square feet of retail space. A strong economy helps to drive up occupancy rates and rents, so unitholders of this REIT are tuned into signs of an improvement in consumer discretionary spending.

Like many REITs, Primaris Retail's units have been Stock Trends Bullish since last June, advancing 43 per cent along the way. The relative strength of the real estate sector has helped this REIT outperform the broad TSX market in seven of the last 10 weeks. Although its first-quarter performance remains below that of many of its REIT peers, this income investment could provide some additional upside as the Canadian economy shows a more robust recovery.

The Upside

Coinciding with the announcement of fourth-quarter results and its March distribution, trading volume in Primaris Retail units popped last week, helping to elevate its price back to the February high of $17.65 before giving back the gains midweek.

A late push on Friday finished the REIT in positive territory, up 3.6 per cent to close at $17.40. A surge in trading volume last October, also following quarterly results and a distribution announcement, presaged a move to new highs above $16. Trend line support is now at the $16.50 level and should help guide the REIT above resistance at the current price.

Primaris Retail's yield is 7 per cent, comparable to the sector yield - immediate advances in the unit price will depend on returning positive economic conditions that support lower yields. Prior to the recession, the units traded at yields in the neighbourhood of 6 per cent. A return closer to that environment gives another 8- to 10-per-cent upside as the units extend toward the next price resistance level around $18.80.

The Downside

The uptrend in Primaris Retail REIT must be supported by continued improvements in domestic economic recovery, as well as management's ability to prudently expand its asset base. A unit price drop below $16 changes the REIT to Stock Trends Weak Bullish and warns of a disappointment.