REIT Misclassification Risks and Market Correction Opportunities: A Sector-Specific Analysis of Primaris and Automotive Properties REITs

In the ever-shifting landscape of real estate investment trusts (REITs), misclassification risks and sector-specific valuation dynamics have emerged as critical factors for investors. As markets grapple with macroeconomic headwinds and evolving tenant demands, the ability to identify mispriced assets and reallocate capital strategically can define long-term returns. Two Canadian REITs-Primaris REIT and Automotive Properties REIT-offer instructive case studies in this regard, illustrating how sector-specific strategies and financial discipline can mitigate risks while unlocking value.

Primaris REIT: Mall Revival and Structural Resilience

Primaris REIT's recent focus on acquiring enclosed shopping centers has reshaped its market positioning, with same-store sales productivity reaching $784 per square foot in 2025-a 12% year-over-year increase, according to Primaris' Q1/25 report. This outperformance is driven by strategic acquisitions, including the Oshawa Centre and Southgate Centre, which have bolstered portfolio quality and diversified tenant bases. Despite challenges such as the anticipated departure of The Hudson's Bay Company (HBC), which accounts for 1,030,600 square feet of leased space, Primaris has reaffirmed its 2025 guidance, citing a strong balance sheet with $4 billion in unencumbered assets and no debt maturing until 2027 (Primaris' Q1/25 report).

However, misclassification risks loom. The departure of HBC could trigger reclassification of underperforming mall assets, potentially distorting occupancy metrics and net operating income (NOI). According to Morningstar DBRS, a deterioration in Primaris's debt-to-EBITDA ratio could lead to a credit rating downgrade, amplifying market volatility (Morningstar DBRS). Yet, disciplined capital allocation-funded through green bonds and asset sales-has insulated the REIT from refinancing risks, offering a buffer against sector-specific headwinds.

Automotive Properties REIT: Triple-Net Leases and Tenant Concentration

Automotive Properties REIT, by contrast, has leveraged its triple-net lease structure to build a defensive portfolio. With a weighted average lease term of 8.8 years and CPI-linked rent escalators, the REIT reported a 4.6% year-over-year increase in rental revenue in Q2 2025 (Automotive Properties' Q2/25 report). Its acquisition of Rivian- and Tesla-tenanted properties in Tampa and Dublin, Ohio, underscores a strategy of geographic and tenant diversification. However, the REIT's 31.2% effective ownership by the Dilawri Group-a major automotive dealership operator-raises concerns about tenant independence and potential misclassification of operational control (Automotive Properties' Q2/25 report).

Analyst reports highlight the REIT's resilience amid rising interest rates, with J.P. Morgan noting that triple-net leases provide stable cash flows even in high-rate environments. Yet, the REIT's debt-to-gross book value ratio of 44.4% (Automotive Properties' Q2/25 report) suggests room for improvement in leverage management, particularly as it pursues accretive acquisitions.

Valuation Impacts and Market Correction Signals

The valuation dynamics of these REITs reflect broader sector trends. J.P. Morgan research projects REIT earnings growth of 3% in 2025, with industrial and retail properties facing greater volatility due to tariffs and economic uncertainty. Primaris's mall-focused strategy, while historically cyclical, has shown unexpected resilience, with its shares up 40% since 2022 (Automotive Properties' Q2/25 report). Automotive Properties, meanwhile, trades at a 4.3% yield-slightly below the REIT sector average of 4.38%-suggesting potential undervaluation given its defensive lease structure (J.P. Morgan research).

Misclassification risks, such as incorrect property valuations or distorted financial ratios, could exacerbate these valuation gaps. For instance, misclassifying Automotive Properties' Rivian-tenanted property as a speculative asset rather than a stable income stream could depress its multiple. Similarly, Primaris's mall redevelopments may be mispriced if markets fail to account for its green bond-funded capital expenditures (Primaris' Q1/25 report).

Portfolio Reallocation Strategies

For investors, the key lies in balancing sector-specific risks with long-term value creation. A diversified approach that pairs Primaris's mall revival with Automotive Properties's triple-net stability could hedge against macroeconomic swings. Additionally, active monitoring of credit ratings and lease terms-particularly for REITs with concentrated tenants-can preempt misclassification-driven corrections.

J.P. Morgan's projection of 6% REIT growth in 2026 further underscores the importance of early entry into undervalued subsectors. For Automotive Properties, this means scrutinizing its $50 million equity offering and its use of proceeds for debt repayment and acquisitions (Automotive Properties' Q2/25 report). For Primaris, it involves tracking HBC's exit costs and redevelopment timelines, which could unlock hidden value in its mall portfolio.

Conclusion

The cases of Primaris and Automotive Properties REITs highlight the dual challenges of misclassification risks and sector-specific valuation dynamics. While both REITs have navigated 2025's uncertainties with disciplined strategies, their paths to long-term value depend on proactive portfolio management and a nuanced understanding of market correction signals. As REITs continue to evolve, investors who prioritize transparency, tenant diversity, and capital efficiency will be best positioned to capitalize on the opportunities ahead.