Real estate investment trusts were a major disappointment last year for investors, as a spike in long-term interest rates brought an end to several years of impressive returns. The S&P/TSX Capped REIT index fell 5.5 per cent.
But Canaccord Genuity believes the poor performance won't be repeated in 2014 and is advising clients not to abandon the high income-producing sector.
It expects most REITs to post double-digit total returns this year, pointing to four factors in particular for its bullish view:
1. Valuations for real estate investment trusts and real estate operating companies (REOCs) are more attractive than they were earlier in 2013, before their steep sell-off;
2. Units appear to have already priced in further interest rate increases;
3. Yields are extremely attractive and generally well funded through cash flows; and
4. Property market fundamentals remain healthy.
A major risk is that Canadian long-term interest rates could rise significantly, without corresponding economic growth in Canada. So the Canaccord analysts, led by Mark Rothschild, believe investors should look for REITs and REOCs with stable and predictable cash flow.
"In particular, there are certain REITs/REOCs that are well positioned to drive cash flow growth organically through increases in same-property net operating income, completing development projects, and refinancing debt at lower rates," they said in a research note.
Among those firms with a market capitalization of over $1-billion, Canaccord recommends CAP REIT (with a $23.40 Canadian price target) and Canadian Real Estate Investment Trust (with a $45.65 price target). Among the smaller caps, it likes Amica Mature Lifestyles (price target $10), InterRent REIT ($6 price target) and Pure Industrial Real Estate Trust ($5.25 price target).