DUNDEE REIT $28.18 (Toronto symbol D.UN; TSINetwork Rating: Extra Risk) (416-365-3535; www.dundeereit.com; Units outstanding: 104.9 million; Market cap: $3.0 billion; Dividend yield: 8.0%) owns and manages 24.3 million square feet of office and retail space across Canada.
As the Canadian economy improves, interest rates will likely rise. That increase—or the anticipation of it—can push down prices of REITs and high-yielding stocks, such as utilities. That’s largely why a number of REITs, including Dundee, have declined.
When interest rates rise, REITs may suffer because they have a lot of mortgage debt, and it’s more expensive to raise money and refinance existing loans. As well, their units, which typically offer high yields, compete with fixed-income instruments for investor interest.
However, higher interest rates are usually accompanied by increased economic activity and growth. That’s good for REITs, because it pushes up demand for space and lets them raise their rental rates. This leads to rising cash flows and higher distributions.
In the three months ended September 30, 2013, Dundee REIT’s revenue jumped 9.1%, to $204.3 million from $187.3 million a year earlier. Dundee bought $140.3 million worth of buildings in the latest quarter and added 277,000 square feet of office space. These new properties supplied most of the revenue increase.
Cash flow rose 11.4%, to $68.3 million from $61.3 million. However, cash flow per unit gained just 3.3%, to $0.63 from $0.61, on more units outstanding.
Earlier this year, Dundee raised its monthly distribution by 2.2%, to $0.187 from $0.183, for a high 8.0% yield.
Dundee REIT is still a buy.
