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What are we looking for?

Over the past 12 months, the iShares S&P/TSX Capped REIT Index ETF (XRE) is down 26 per cent, while its distribution yield is up 31 per cent. Today we will look at whether real estate investment trusts, a generally high-yielding sector, have cut distributions since the March lows, and also examine their valuations for possible buying opportunities.

The screen

We used StockCalc’s screener to select the 10 largest REITs on the TSX. We then use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether they are undervalued or overvalued compared with their price.

Overview of the techniques used:

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  • Discounted cash flow (DCF value) is a valuation technique where cash-flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage we use the consensus target price. Note: When calculating fundamental valuation for an industry such as this the dominant model is adjusted book value. This model works very well for asset-intensive business such as REITs.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30.

What we found

The REIT sector covers a wide spectrum of the Canadian landscape and economy: Holdings for these companies include housing and apartment complexes, hotels, commercial and industrial space, retail locations and office buildings.

From a dividend perspective almost all of the names on this list have maintained their distributions since the start of the pandemic. From a valuation perspective they look intrinsically undervalued, anywhere from a few percentage points to 30.9 per cent in the case of RioCan. It is also worth noting that REITs have a lot of debt in their capital structure. They require the debt to construct and maintain their infrastructure. A high debt level in this industry is manageable if the REIT maintains high occupancy rates and the associated cash flows.

Let’s look at a couple of these companies:

RioCan REIT owns, develops and operates a portfolio of retail-focused, increasingly mixed-use properties. Its property portfolio includes shopping centres and mixed-use developments, with most of its properties located in Ontario. Tenants include supermarkets, restaurants, cinemas, pharmacies and corporate offices. RioCan has the highest distribution on our list and in May, Ed Sonshine, its chief executive officer, told investors the trust’s distributions are safe. From our calculations RioCan is also the most undervalued REIT on the list.

H&R REIT is the only trust on this list that cut its distribution since the COVID pandemic started. In May, it cut monthly payout from 12 cents a share to six cents. At the current stock price its yield is still 7 per cent even with the cut. H&R owns and manages a real estate portfolio divided between property in Ontario and Alberta and in the United States. The majority of H&R’s assets are office buildings in Ontario.

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Northview and Granite unit prices are up over the past 52 weeks owing primarily to the types of properties in their portfolios: Northview is one of the largest publicly traded multifamily REITs in the country and holds a portfolio of residential suites in more than 60 markets. Granite is focused on industrial properties for warehouse and logistics, with its largest tenant being Magna International Inc.

You can see in the accompanying table the percentage difference between each stock’s recent closing price (Sept. 18) and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from the three models and analyst target data, though it should be noted negative DCF values would be skipped by our algorithm when calculating overall value.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian-listed real estate investment trusts

NameTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Rtn. (%)Distrib. Yld. (%)
Cdn. Apt. Properties REITCAR-UN-T7,794.445.6853.4717.0-14.7742.1354.0356.88-13.03.0
RioCan REITREI-UN-T4,737.214.9119.5230.918.1018.0525.8320.96-37.59.7
Allied Properties REITAP-UN-T4,723.737.1247.5128.0-88.0542.7754.3350.67-27.34.4
Granite REITGRT-UN-T4,463.977.1878.802.1-64.4940.3076.1080.5925.33.7
Choice Properties REITCHP-UN-T3,914.612.6113.527.236.4011.5311.5013.31-6.85.9
SmartCentres REITSRU-UN-T3,592.621.1423.249.921.6821.4431.5924.88-28.98.7
CT REITCRT-UN-T3,207.614.0214.956.612.519.2215.7815.214.25.6
First Capital REITFCR-UN-T3,159.214.4217.1819.222.8916.2821.9717.79-31.25.5
H&R REITHR-UN-T2,925.810.2011.8115.823.308.7518.9213.86-50.47.0
Northview Apt. REITNVU-UN-T2,451.635.3636.021.853.6521.3731.9636.2526.14.6

Source: StockCalc

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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