Nothing says stability like bricks and mortar. Perhaps that's why real estate investment trusts (REITs) and real estate operating companies (REOCs) have enjoyed such good times over the past couple of years as investors search for dependable yields in an unpredictable economy. But after the large gains, is it still possible to find value in the sector? With the help of a recent report from Desjardins Securities, we went looking.
What are we looking for?
Canadian REITs or REOCs that can appeal to value-oriented investors. More specifically, we went in search of real estate firms trading at significant discounts to their net asset values (NAV).
What did we find?
Several REITs and REOCs that met our criteria.
Jeff Roberts, author of the Desjardins report, believes the REIT sector as a whole is well positioned for attractive returns over the coming year. "Demand for properties remains strong," he writes, noting that not only REITs, but institutions and private investors are now chasing income-producing properties.
In addition, mortgage rates continue to be low, financing conditions are solid, and fundamentals are improving in most Canadian property markets. Capitalization, or "cap," rates are still declining but should stabilize in the second half of the year. (Cap rates measure how much net operating income a property throws off in relation to its purchase price.)
That said, not all REITs offer the same prospects. Mr. Roberts is a strong believer in assessing real estate investments by looking at the gap between their stock market valuations and estimates of their NAV. He thinks some REITs and REOCs are now fully valued, or nearly so, while others are trading below NAV.
The accompanying chart shows premiums or discounts to NAV for several REITs and REOCs. Mr. Roberts' top pick is Mainstreet Equity, a Calgary-based mid-market apartment owner, which trades at a 32-per-cent discount to NAV and has strong prospects for growing its cash flow. Another favourite is Melcor Developments, an Alberta-based land developer that he estimates is trading at a 38-per-cent discount to NAV.
Given Mr. Roberts' generally positive outlook for the sector, he also likes some firms that are trading at smaller discounts or even premiums. Among small- to medium-capitalization players, he prefers Huntingdon, Homburg, Killam and Retrocom. Within the large-cap universe, he likes Boardwalk, H&R, Allied, Calloway, Cominar, Dundee and RioCan.