Investors should examine a REIT’s distributions carefully. Pictured is Lawrence Square Shopping Centre which is owned by Riocan REIT.Louie Palu/The Globe and Mail
Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.
RBC Dominion Securities has upgraded Canada's largest real estate investment trust to the equivalent of a buy rating, believing investors have a rare opportunity to load up on its units while it's trading on par with its net asset value.
The upgrade of RioCan Real Estate Investment Trust to "outperform" from "sector perform" by RBC analyst Neil Downey follows a 9 per cent fall in its units in the second quarter. The sudden rise in bond yields in June made income-producing securities such as REITs relatively less attractive – especially after their prolonged period of steady price gains.
Mr. Downey believes higher bond yields will continue to be a headwind for REIT investors moving forward, making it all the more important to pick quality names. RioCan – which owns interests in a portfolio of more than 340 retail centres across North America – is one that stands out.
"We expect our recommended list may move further toward those entities where we see the greatest balance sheet strength, quality assets, and strength in the business model," he said in a research note.
"REI's size, low-leverage and diversity of funding (mortgages/unsecureds/ preferreds) allow it to entertain virtually every potentially suitable investment opportunity in the market. Despite this, REI is disciplined on the acquisition front, citing the desire to be aggressive only in situations where it sees strategic merit," he said.
And right now, RioCan could be going for a very attractive price. Its units are now equal to the REIT's net asset value. It had been trading well above NAV over the past four years, he notes. (click here to see a unit price vs. net asset value comparison since 1996)
And even with 10-year government of Canada bond yields at 2.4 per cent – a rise of 65 basis points from the end of March – RioCan can still secure 10-year mortgages at slightly below its 4.5 per cent cost of existing debt, he noted.
Target: Mr. Downey maintained a $31 price target. The average analyst price target is $29.67, according to Bloomberg data.
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JPMorgan analyst Mike Cambardella downgraded Alcoa Inc. to "neutral" from "buy," seeing few catalysts to move the stock higher amid soft aluminum prices.
JPMorgan recently lowered its 2013 aluminum price forecast to 89 (U.S.) cents per pound from 94 cents, and cut its 2014 outlook to 93 cents from $1.06, as supply continues to outstrip demand.
"Alcoa has clearly taken steps to lower its costs in its upstream segments (Alumina and Primary Metals) and to grow its downstream businesses (Global Rolled Products and Engineered Products & Solutions). However, we believe these efforts will be largely overshadowed by a persistently weak aluminum price environment, which should weigh on AA's earnings and stock price," Mr. Cambardella said.
Alcoa shares slipped to four-year lows in Wednesday trading.
Target: Mr. Cambardella cut his price target to $9 from $12 (U.S.). The average target is $9.
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Raymond James analyst Steve Hansen downgraded CanWel Building Materials Group Ltd. to "market perform" from "outperform," citing near-term headwinds facing the Canadian housing market and volatile building materials pricing.
"Unfortunately, languishing Canadian housing starts and a sharp recent downdraft in LBM (lumber and building materials) pricing give us reason to temporarily move to the sidelines until visibility improves," Mr. Hansen said. "Specifically ... Canada Mortgage and Housing Corporation's most recent forecast calls for a 4.6 per cent drop in 2013 single-family starts, while lumber and OSB (oriented strand board) prices have recently tumbled 28.4 per cent and 43 per cent from their respective highs earlier this year."
Target: Mr. Hansen trimmed his price target to $2.80 from $3. The average target is $2.54.
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Recent weakness in the Canadian dollar and strong fuel margins should breathe fresh life into shares of convenience store operator Alimentation Couche-Tard Inc., said Desjardins Securities analyst Keith Howlett.
He reiterated a "buy" rating ahead of the company's fiscal fourth quarter earnings report next week.
Target: Mr. Howlett raised his price target to $70 from $64. The average target is $63.20.
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Champion Iron Mines Ltd. has backed out of a commitment to contribute $20-million to a new multi-user port at Pointe Noire, Quebec, further evidence of the financial squeeze faced by junior miners, noted Desjardins Securities analyst Jackie Przybylowski.
"We expect that the decision to terminate the port agreement is due to a lack of funds," commented Ms. Przybylowski. She downgraded the stock to "hold" from "buy," due to increased uncertainty over the company's ability to finance the development of its Fire Lake North project in the province, which Champion has suggested would begin production in 2017.
Target: Ms. Przybylowski cut her price target to 45 cents
from 55 cents. The average target is 88 cents.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities
Darcy Keith