StockCalc Hunting for REITs that are attractively valued
What are we looking for?
The U.S. jobs report on Friday saw payroll numbers grow by 256,000 in December, much more than the 155,000 analysts expected. Bond yields rose on this news, and the expectation of more rate cuts by the Federal Reserve was quickly dispelled. Real estate investment trusts (REITs) are interest-sensitive investments, and we saw their prices fall from 1 to 3 per cent on this news. Let’s look at valuations for the 10 largest public REITs in Canada.
The screen
We used StockCalc’s screener to select the top 10 listed REITs by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which 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 a stock’s 10-year average price-to-book ratio.
- If a stock has analyst coverage, we may look at the consensus target price.
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,”which offers a 30-day free trial and special pricing for the second month.
What we found
Seeking value in REITs
| Name | Ticker | Market Cap ($ Mil) | Recent Close ($) | StockCalc Val ($) | Diff (%) | DCF Value($) | Price Comps($) | ABV ($) | Analyst Target ($) |
| Choice Properties REIT | CHP-UN-T | 9487.8 | 13.11 | 13.06 | -0.4 | 23.08 | 14.06 | 7.05 | 15.75 |
| CAPREIT | CAR-UN-T | 6974.3 | 41.71 | 45.86 | 9.9 | 9.55 | 27.71 | 57.13 | 55.18 |
| Riocan REIT | REI-UN-T | 5522.4 | 18.41 | 18.62 | 1.1 | 2.36 | 12.78 | 23.50 | 22.09 |
| Granite REIT | GRT-UN-T | 4286.4 | 68.32 | 78.18 | 14.4 | 40.03 | 41.52 | 96.52 | 92.57 |
| SmartCentres REIT | SRU-UN-T | 4158.6 | 24.41 | 24.66 | 1.0 | 24.66 | 13.95 | 35.31 | 27.21 |
| Chartwell Retirement | CSH-UN-T | 4061.7 | 14.92 | 14.6 | -2.1 | -0.21 | 5.34 | 15.20 | 18.33 |
| First Capital | FCR-UN-T | 3564.9 | 16.79 | 15.7 | -6.5 | 16.21 | 4.41 | 18.64 | 20.53 |
| Dream Industrial REIT | DIR-UN-T | 3367.9 | 11.6 | 11.77 | 1.4 | 5.08 | 7.00 | 14.51 | 16.17 |
| CT Real Est IT | CRT-UN-T | 3361.4 | 14.25 | 14.38 | 0.9 | 11.43 | 10.11 | 18.02 | 15.96 |
| Boardwalk REIT | BEI-UN-T | 3328.9 | 61.75 | 68.44 | 10.8 | 55.00 | 39.88 | 68.44 | 87.03 |
This sector comprises real estate operations that cover a wide spectrum of the Canadian landscape and economy. Holdings for these companies include housing and apartment complexes, hotels, commercial and industrial spaces, retail locations and office buildings. As with other asset-intensive businesses, our valuation models weigh the adjusted book value highly in the overall calculation.
We are still expecting interest rates to fall this year but at a slower pace than previously thought. The odds of a quarter-point (25 basis points) rate cut by the Fed at its meeting in March are now only one in four and are still less than the 50-50 odds for the May meeting, according to the CME FedWatch tool. We expect a similar trend for the Bank of Canada’s policy rate, with current forecasts pointing to a quarter-point cut in March. A falling rate environment reduces borrowing costs for this asset-intensive industry and makes dividend yields more attractive than lower-risk fixed-income investments. Both of those support underlying trust prices and dividends.
The analyst outlook is positive on the sector. In The Globe and Mail and elsewhere, we see analyst forecasts of 10- to 25-per-cent total return for this sector in 2025. Over the past 12 months, year-over-year prices for these trusts have moved very little, with returns coming from dividends. The average dividend yield for companies on this list is just over 5 per cent. From a valuation perspective, our weighted models are showing most companies at or near their current price but with an upward bias.
Let’s look at a few of these companies:
Choice Properties Real Estate Investment Trust invests in retail, industrial, mixed-use and residential properties across Canada. The company’s portfolio consists primarily of shopping centres anchored by supermarkets, as well as stand-alone supermarkets. The properties are located in Ontario, Quebec, Alberta, Nova Scotia, British Columbia and New Brunswick. The company’s principal tenant, Loblaw Cos. Ltd., contributes the majority of total rent. Our models are both above and below the current price, with our weighted valuation in line with the most recent closing price. We see a 20-per-cent upside to the current price from the analyst consensus target.
Granite Real Estate Investment Trust is engaged in the acquisition, development, ownership and management of logistics, warehouse and industrial properties in North America and Europe. The company’s tenant is Magna International Inc., an automotive parts and systems manufacturer that accounts for the majority of Granite’s lease income. We show upside to GRT-UN-T (and to Magna’s stock price). Analysts are also bullish on Granite’s price target.
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and analysts’ target data if used.