Globe editors have posted this research report with permission of Dundee Capital Markets. This should not be construed as an endorsement of the report’s recommendations. For more on The Globe’s disclaimers please read here. The following is excerpted from the report:
1. How does the current correction compare with past bear markets?
While the recent correction is the sharpest since the 2004 bear market, the decline in the S&P TSX REIT Index has not crossed the 20-per-cent level yet. As of Sept 27, 2013, the Index was down 16.2 per cent from its peak on April 30.
2. Where is the current sector valuation as compared to historical averages?
The answer is mixed. The sector is trading above / in-line with historical averages on the basis of absolute metrics, such as cash yield and price-to-FFO-multiple. On the other hand, the sector is undervalued when applying relative valuation metrics, such as price-to-NAV and cash yield spread over the 10-Yr GOC Yield. We believe, ultimately, the cash yield level should act as support for the sector.
3. How has the recent correction affected acquisition fundamentals for REITs?
Our analysis shows that minimum accretive cap rates have increased on average by 50bps for the sector.
4. How would a 125bps increase in interest rates impact REIT cash flows?
The impact would not be material. We tested REIT cash flows against rising debt costs of 50bps in 2014 and an additional 75bps in 2015.
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