High Volatility + Deep Discounts = Opportunity
The Canadian reits have been experiencing very high volatility in 2022. Public market real estate has fallen considerably with XRE Capped Reit Index down 25% ytd. Discounts to Net Asset Values are currently bigger than 2008 GFC Levels and almost at the Covid crash lows.
Rising interest rates and the looming possibility of a global recession have been heavily discounted into the price of public real estate despite many reits continuing to deliver strong fundamental performance.
This divergence between prices and performance has created opportunities with the average Canadian Reit offering a 30% discount to NAV and some offering as much as a 50% discount to NAV. There is also a very large gap between public and private real estate valuations.
Steve Schwarzman CEO at Blackstone highlighted a 3000 basis point divergence between its private portfolio and public market reit performance.
Jussi Askola expects high levels of reit M&A activity to continue with big discounts to NAV and Blackstone both buying reits and raising more capital.
"Real estate values are stable or up in 2022, but REIT share prices are down sharply, and as a result, many now trade at large discounts to their net asset value. Historically, it has almost always been a great time to accumulate REITs when they were priced at large discounts. Will this time be different? Blackstone is telling us that it won't be, and they know real estate better than anyone else. " - Jussi Askola, High Yield Landlord
This wonderful Canadian Reit Mean Reversion chart from CIBC is quite a helpful way to visualize the current discounts in the Canadian reits.
The Reit Mean Reversion chart looks at the current Price/FFO earnings multiple on the vertical axis and the discount/premium to the historical earnings multiple average on the horizontal access.
Reits that are furthest to the left offer the highest reversion to the historical earnings multiple mean potential and companies that are closest to the bottom offer the cheapest current price/ffo multiple.
The actual data is from the end of September however it is still a great visualization of Reit valuation.
Pay attention to how sectors are grouped by colour and which reits offer the best earnings valuation / reversion potential combination in each sector.
Dream Industrial and Riocan stand out in the industrial and retail sectors using these metrics. Dream Office Reit and Allied Properties are both attractively positioned in the office sector.
In my last post in June, I recommended a bear market defensive shift selling Dream Office Reit and Primaris Reit and focusing on Riocan, HR, VICI as my strong performer picks.
Now that we have had a few more months of the bear market and valuations are too low to ignore I believe it is time to shift into deep value reits and pick up some of the discounts Mr. Market is offering.
My most recent purchases have been Dream Industrial 16%, Dream Unlimited 10%, and Dream Office 8%. This Dream Team of Michael Cooper stocks have significantly underperformed Riocan/Vici/Suncor (what I sold) this year and created this buying opportunity. Selling Dream Office at $23-$25 made sense in a difficult macro-economic environment but Dream Office in the $15-$17 price range is too cheap to ignore - even for the unloved office sector.
For the last couple of years a few value investors on Twitter including @cdnvaluestocks have encouraged me to venture beyond the Dream REITS and buy the parent Dream Unlimited as it offers the deepest value and has a historically high return on equity through a combination of its growing asset management business, land portfolio, reit assets, and development business.
I have always been focused on REITS and appreciate the juicy monthly income they provide, however Dream Unlimited is at such a low price relative to its value (>$60) and has such a great business model that I am willing to step outside of my REIT box to get into the King of the Dream family.
For a nice overview of Dream Unlimited read Tyler's work at Canadian Value Stocks.
I have also included some Dream Industrial Highlights below.
6.52% Dividend Yield, 29.7% Net Debt to Total Assets,
99% Occupancy Rate
Dream Industrial has executed a European debt strategy transferring all of its debt into EUR at a 1.01% interest rate and has maintained a low net exposure to Europe hedging euro debt with euro assets
90% of European Leases are indexed to CPI. European CPI is up 10.94% in the last year. This structure is very profitable with high European CPI combined and low 1% European interest rates.
They are effectively Borrowing in EUR and building/expanding assets in Canada + USA
Developing North American Industrial Assets with European Debt = Value Creation
Deleveraged from 47.9% Net Total Debt to Total Asset (2017) down to 29.7% in 2022
Well-Staggered Debt Maturities
NAV has been growing for 6 years
Historical total returns to unitholders significantly outperformed both the TSX + Capped Reit Index since 2017
Disclaimer: This article should not be taken as legal investing advice. The choice is yours whether to invest in any asset or not (please do your own research).
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