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Double-digit returns seen this year for REITs

Canadian real estate investment trusts enjoyed a prosperous 2010, as investors chased yield to supplant the pitifully low interest rates being offered on bonds.

With interest rates still low and property markets showing few signs of crumbling, that run of good fortune may continue into 2011.

In fact, argues Canaccord Genuity, the stars are aligned for another year of double-digit total returns in the sector.

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"In our view, the confluence of a cyclical upturn in property markets and a low interest rate environment is supportive of another strong year of sector outperformance relative to the broader equity market," analyst Mark Rothschild wrote in a report today. "While we expect that most REITs will maintain their distributions at current levels, there should be some modest increases from the REITs with lower payout ratios."

If Mr. Rothschild's predictions come true, REIT investors should indeed be in for a prosperous new year. He forecasts that Canadian REITs will deliver total returns in the 15 to 20 per cent range, including distributions.

He hiked his target prices on six names: Brookfield Asset Management (to $36.35 U.S. from $35); Dundee REIT (to $34.20 Canadian from $32.60); Mainstreet (to $17.50 from $14); Northern Property REIT (to $28.60 from $27.25); Pure Industrial REIT (to $5 from $4.25); and Whiterock REIT (to $23 from $20.50)

His top picks for 2011 are Brookfield Office Properties , Dundee REIT, First Capital Realty , H&R REIT and Amica Mature Lifestyles .

Fourth-quarter North American box office numbers were lacklustre, exacerbated by Warner Bros.' decision to release the latest Harry Potter offering in 2-D rather than the initially planned 3-D, said Raymond James Ltd. analyst Kenric Tyghe. As a result, Cineplex Inc.'s revenues in the quarter will come in 3 per cent below year-ago levels, he said.

Downside: Mr. Tyghe downgraded the stock to "market perform" from "outperform" but kept his price target at $24.

Plutonic Power Corp. will buy a 10 per cent share in three solar projects in Ontario for $30-million, its first move outside of the B.C. market. National Bank Financial analyst Rupert Merer said it was a positive move that will be accretive to earnings and help diversify the company's portfolio.

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Upside: Mr. Merer hiked his price target by 10 cents to $2.60 but lowered his rating to "sector perform" from "outperform" because of recent gains in the stock.

Related: GE plugs into Ontario’s solar energy market

Savanna Energy Services Corp. curtailed its well servicing operations in December due to extreme rainfall in the Queensland region of Australia. One of its service rigs is expected to incur significant damage, which will delay deploying assets back into the field, noted CIBC World Markets Inc. analyst Jeff Fetterly

Downside: Mr. Fetterly downgraded the stock to "sector underperformer" from "sector performer," but maintained his $6.75 price target. He said the net impact of the flooding is a 3 per cent reduction to his 2011 financial estimates.

Petrominerales Ltd. announced a successful light oil test from its Yatay-1 well in Colombia. TD Newcrest analyst Jamie Somerville said this re-establishes a track record of exploration success for the company and boosted his net asset value per share estimate by 7 per cent to $37.68.

Upside: Mr. Somerville raised his target price by $3 to $39 but maintained a "hold" rating given recent price appreciation.

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Related: Petrobank Energy looking oversold

Canaccord Financial Inc.'s potential earnings leverage is not reflected it its current valuation and further upside remains, argues TD Newcrest analyst Doug Young. Equity financing activity in December was very robust, and there was healthy activity in mergers and acquisitions and equity trading.

Upside: Mr. Young hiked his target price by $3 to $17, adding that he believes the company's fiscal third quarter will be a strong one.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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