One data point does not a trend make, but Statistics Canada’s (StatCan) latest report on foreign investors’ transactions in Canadian securities harkens back to the beginning of the global financial crisis. In June, non-resident investors unloaded CAD15.4 billion of Canadian securities, the largest such liquidation since October 2007, when foreign holdings fell by CAD24.1 billion.

Fortunately for equity investors, the uncomfortable comparison fades once you delve into the data. Indeed, bonds accounted for the entirety of the plunge in holdings, with foreign investors selling a record CAD19 billion of Canadian bonds.

By contrast, non-resident investors increased their holdings in Canadian equities by CAD3.2 billion, the third consecutive month of positive inflows and the largest such inflow since September 2012. Much of the increase in equity holdings was due to new issuance, though investors in the secondary market also added to their holdings in the energy and banking sectors. This buying activity occurred despite the fact that the Canadian market dropped 4.1 percent in June, falling to its lowest level since August of last year.

And even fixed-income investors may not have much to worry about, as StatCan says that most of the decline in holdings in this area was actually due to bonds reaching maturity. And much of this activity occurred in debt issued by the federal government, and secondarily by provincial governments, whose holdings among foreign investors dropped by CAD7.1 billion and CAD3.5 billion, respectively. Holdings of debt issued by government-owned business enterprises also fell by CAD8.8 billion during the month. Additionally, StatCan notes that the supply of government debt fell sharply in June, which perhaps explains why investors didn’t roll over their investments from maturing bonds into new debt instruments.

At the same time, corporate debt holdings actually increased by CAD1 billion, which was the fifteenth consecutive month of inflows. Despite June’s dramatic drop in bond holdings among foreign investors, inflows are still up CAD16.1 billion year to date.

Interestingly, equities did suffer a drop of similar magnitude to bonds back in February, when holdings among foreign investors fell by CAD11.6 billion, which was the largest such divestment since October 2007 (again with that fateful month). Although the stock market suffered some downward volatility in February, the S&P/TSX Composite index still ended that month up 1.1 percent, on a price basis.

But even here, there’s nothing to be alarmed about. StatCan attributed most of these sales to foreign investors tendering their shares as the result of mergers and acquisitions. By contrast, non-resident investors actually increased their equity holdings via the secondary market by CAD1.8 billion that month. Even so, February’s result means that equity holdings among foreign investors have actually declined by CAD3.2 billion year to date.

Meanwhile, although the Canadian dollar fell below parity with the US dollar in mid-February, it continues to outperform the currencies of other commodity-oriented economies, such as Australia. The loonie currently trades near USD0.955, down 7.5 percent from the currency’s trailing-year high of USD1.03 back in September. Some economists attribute this surprising strength to Canada’s energy-dependent exports, particularly its emphasis lately on crude oil, which accounts for 15.3 percent of the country’s merchandise exports.

The Roundup

Office landlord Dundee REIT (TSX: D-U, OTC: DRETF) reported CAD0.72 in funds from operation (FFO) per unit, which was flat year over year. Nevertheless, that result narrowly beat analyst expectations by 0.3 percent, the REIT’s first upside surprise in five quarters. In response, EVA Dimensions boosted its rating from “overweight” to “buy,” but CIBC World Markets lowered its rating from “sector outperform” to “sector perform.”

The mix of analyst sentiment now consists of four “buys,” two “holds,” and no “sells.” The consensus 12-month target price is CAD35.10, which is 21.4 percent higher than the current unit price. Analysts forecast full-year 2013 FFO per unit of CAD2.85, which is flat versus the prior year. For 2014, analysts project full-year FFO per unit of CAD2.89, a rise of 1.4 percent.

During growth periods, REITs tend to issue significant amounts of equity and debt to finance the expansion of their portfolios. In the second quarter, for instance, Dundee raised CAD230 million from an equity offering and another CAD175 million from an issuance of senior unsecured debentures.

Since a REIT’s distributions are ultimately derived from FFO, it’s important to monitor FFO per diluted share to ensure that it’s not declining over time as secondary issuances increase units outstanding. Of course, the preferable outcome is for FFO per diluted share to at least grow modestly, which will hopefully lead to future increases in the REIT’s payout.

The other thing to be aware of is that once we enter a rising-rate environment, where income-oriented securities such as REITs face greater competition from fixed income, that will presumably reduce demand for REIT equity and slow the pace of secondary issuances. Additionally, higher rates will also make borrowing more expensive, which should rein in debt issuance as well.

As such, management has acknowledged that because of these market conditions, it will shift its focus to internal growth, producing gains through redevelopment and greater operating efficiencies, as opposed to growth via acquisitions. Even so, investors should expect Dundee to continue to make opportunistic acquisitions, even if these happen less frequently.

Since the end of 2008, the number of Dundee’s units outstanding (REIT Units, Series A) has grown more than sixfold, from 16.9 million units to 104.6 million units.  Over the trailing 12-month period, Dundee generated CAD2.82 in FFO per diluted unit, up 4.8 percent from the REIT’s calendar-year low of CAD2.69 in 2011, but down 6.3 percent from the all-time high of CAD3.01 in 2008.

Many REITs, including Dundee, have used the historically low interest-rate environment to improve their capital structures by refinancing debt at more favorable rates, while using the capital markets as a cheap source of financing. Dundee has reduced its debt-to-gross book value to 46.4 percent, down 4.8 percentage points from a year ago and the lowest level in the REIT’s 10-year history. At the same time, its weighted average interest rate is just 4.4 percent, compared to 5.8 percent back in 2008. And management believes that even as rates rise, it could still refinance some of its higher-cost debt at more advantageous rates.

Meanwhile, the value of Dundee’s real estate portfolio has grown more than sevenfold over that same period, from a net book value of CAD984.3 million at the end of 2008 to CAD7.1 billion at the end of June.  At quarter’s end, Dundee owned a total of 24.3 million square feet of gross leasable area situated in what it characterizes as well-located, high-quality central business districts and suburbs.

Dundee is now the largest landlord of office space in the Greater Toronto Area, with 46 percent of its portfolio located there (based on square footage). The REIT has 21 percent of its portfolio located in energy-rich Western Canada, as well as 15 percent in Calgary, and 18 percent in Eastern Canada.

Overall net operating income grew 17.5 percent, to CAD112.1 million, thanks to acquisitions, including CAD360.1 million of office properties (five properties, totaling 1 million square feet) during the second quarter.

By contrast, same-property NOI rose just 1.2 percent year over year, to CAD69.8 million. Management attributed this result to higher rents from lease-renewal activity, as well as rent increases from step-up agreements.

The average occupancy rate among Dundee’s rental properties stood at 94.9 percent at the end of June, up two-tenths of a percentage point sequentially, but down two-tenths of a percentage point from year-end 2012. On a calendar-year basis, the REIT’s all-time high occupancy rate was 96.7 percent in 2009, while the current result is plumbing the lows, even if the latest quarter marked a modest rebound. Regardless, we’re talking about a difference of 1.8 percentage points from the high, and Dundee’s occupancy rate is 3.6 percentage points higher than the national average.

Management did note a softening in the Canadian office market, with a glut of new construction along with declining demand, as evidenced by a rising national vacancy rate, which increased by 40 basis points during the quarter. That could mean a longer lead time will be necessary to lease vacant space, and management will have to be particularly attentive to retaining tenants, while successfully negotiating higher lease renewals.

The average remaining lease term across its portfolio is 5.3 years. A substantial portion of Dundee’s tenant base is concentrated among firms that offer professional services, with the finance and insurance industry accounting for 21.4 percent of contracted rents, while public administration and scientific and technical services account for 17.6 percent and 16.7 percent of contracted rents, respectively.

Because of the varying duration of leases across a REIT’s portfolio, the average rent across its properties typically lags the market during periods of rising rents. Dundee’s average rent for existing leases is CAD17.43, down 0.3 percent from a year ago. However, this average rent is also 11.5 percent below management’s estimate of the average market-based rent for comparable properties in the various regions in which the REIT operates. So that gives some sense of potential growth in rents as the leases for the REIT’s properties come up for renewal.

However, Dundee has staggered these renewals over a number of years, with just 3.9 percent of its portfolio up for renewal in 2013, though 9.7 percent of its properties are up for renewal in 2014. Over the next four calendar years, an average of 9.5 percent per year of the REIT’s portfolio will have leases up for renewal, with the largest portion in 2016, at 15.2 percent. By limiting the percentage of rollovers that occur each year, a REIT can shrewdly insulate itself from the risk of a poor rental market, even if that means it won’t always have substantial exposure to years in which rents are climbing.  

In mid-May, Dundee announced that it had renewed its normal course issuer bid, a Canadian term for a share repurchase program, with approval from the Toronto Stock Exchange to buy back as many as 8.85 million units outstanding over the subsequent 12-month period. That was equivalent to 10 percent of Dundee’s float at the time of the announcement.

Of course, it’s not worth getting too excited about this program. Though management has renewed this program in each of the last five years, the last time Dundee actually repurchased its units was in 2008, when it bought back 826,900 units, which was almost 4.8 percent of total units outstanding at the beginning of that year. And the buyback was partially offset by the creation or issuance of nearly 381,000 new units, largely as the result of the REIT’s distribution reinvestment plan.

Dundee became a pure-play office REIT last year when it spun off its portfolio of industrial properties (6.6 million square feet of gross leasable area across 86 light industrial properties) as Dundee Industrial REIT (TSX: DIR-U, OTC: DREUF). Industrial properties tend to have lower rents per square foot than office properties. Regardless, Dundee REIT still has exposure to this portfolio, as it maintains a 29.3 percent stake in Dundee Industrial REIT.

Management has indicated that it does not consider this investment strategic, but rather intends to maintain it while it helps the new entity grow into a larger, more liquid vehicle. Longer term, Dundee intends to sell down its stake once the industrial REIT is firmly established and management sees superior opportunity for reinvestment.

Dundee’s units are down 26.5 percent on a price basis, since hitting a year-to-date high of CAD38.93 in late January, and its units currently trade just above their 52-week low. The REIT’s units have been on a long downward slide this year, with the selloff intensifying in late May and again in late July.

Dundee pays a monthly distribution of CAD0.18666, for a current yield of 7.7 percent. During the second quarter, the REIT raised its distribution for the first time since 2003, when it was formed from the reorganization of Dundee Realty Corp. The increase in payout was a modest 2 percent, though it should be noted that Dundee maintained its prior payout through the Great Recession. On a per-unit basis, the REIT’s total payout during the quarter accounted for 78.9 percent of its FFO. Dundee REIT remains a buy below 39 in the Conservative Portfolio.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the second quarter of 2013:

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–August Portfolio Update
• Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 13 Maple Leaf Memo
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 22 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–August Portfolio Update
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Aug. 8 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 7 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 8 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–August Portfolio Update
• Dundee REIT (TSX: D-U, OTC: DRETF)–Aug. 21 Maple Leaf Memo
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 13 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 8 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–August Portfolio Update
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–Aug. 13 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Aug. 9 (confirmed)
• RioCan REIT (TSX: REI, OTC: RIOCF)–August Portfolio Update
• Shaw Communications Inc (TSX: SJR/A, NYSE: SJR)–July Portfolio Update
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Sept. 25 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–August Portfolio Update

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–August Portfolio Update
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 14 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–August “In Focus”
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–August Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Aug. 8 (confirmed)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Aug. 8 (confirmed)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Aug. 9 (confirmed)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Aug. 8 (confirmed)
• Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF)–August “In Focus”
• Newalta Corp (TSX: NAL, OTC: NWLTF)–August Portfolio Update
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–August Portfolio Update
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–August Portfolio Update
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 22 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–August “In Focus”
• Wajax Corp (TSX: WJX, OTC: WJXFF)–Aug. 9 (confirmed)