Canadian Real Estate Investment Trusts

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All Real Estate Trusts are different but some things impact them similarly. The Covid lockdowns destroyed the office REITS, but a slowing economy and the fastest interest rate increase in history have put stress on many commercial re-financings and business conditions in general.

The Canadian REIT index is now down 33% from its 2022 recovery highs.

Canadian REIT valuations are trading at one of the steepest discounts to NAV since 1996 (source: RBC). Several are trading at even steeper discounts despite recent asset sales at full International Financial Reporting Standard values demonstrating the likely value of their asset bases. Some are buying back units at huge discounts. The sector has bounced back every time since and the vast majority of REITs continue to meet or exceed analysts' estimates.

Canadian REITs have been so beaten down by the macro environment, that they arguably offer the single best way to find value in Real Estate. So, while we are beginning the search for value with the right assets, the chart analysis is easy; almost all are in major downtrends showing little sign of a bottom. Still, many have actually begun to increase their distributions, suggesting that the value proposition may not be too far off.

Below is a very quick look at two widely followed names:

Allied Properties:

(AP.UN, TSE)

AP develops, owns and leases a portfolio of high-quality office and retail properties in Canada’s urban cores. Allied’s unique property portfolio in the Office REIT sector positions the firm to benefit from urbanization and demographic trends.

Allied Properties had a debt load that was just too high for us the last time we checked on it but a recent disposition of the REIT’s data center properties will fund a welcome deleveraging of the balance sheet.

Also, Allied Properties just increased its dividend for the 11th consecutive year. Units are currently yielding 11.8%. Encouraging, but at a level where distribution cuts normally come into the discussion.

Technically Speaking:

AP/UN.TO (1 Year Daily) There isn’t much to say here. From a trend perspective the untrained eye can see this thing has been destroyed, like most REITS. There is a slight positive RSI momentum divergence during this last dump but, as always, I need to see it stabilize and form some kind of turnaround or bottoming structure.

SmartCentres Real Estate Investment Trust

(SRU.UN, TSE)

SRU has commercial, industrial and now residential portfolios and retail properties enjoying a high occupancy, primarily anchored by Walmart Supercenters.

The current The REIT’s high payout ratio suggests further distribution increases into question.

This is a REIT in transition trying to create a value-creation opportunity, so gains intended to come not just from the distribution.

SmartCentres is trading at a 16X Funds from operation which is 2X ahead of majors RioCan REIT (REI.UN:CA) and 4X ahead of H&R REIT (HR.UN:CA). As such, SRU.UN may be challenged to represent a significant upside opportunity.

Technically Speaking:

(SRU.UN, Three Year Weekly) There isn’t much to say here either. Recently breaking support and in a clear downtrend, we’ll keep searching for the most undervalued REITs, with the best assets, build the list and wait for them to show signs of life in the chart, before considering investment.

When they do show sudden reversals, or create bases from which they eventually recover, Canadian REITs could create another generational opportunity for growth and income for Canadian investors.