Is Primaris Real Estate Investment Trust (TSX:PMZ.UN) Undervalued Amid Retail Sector Challenges?

The real estate investment trust (REIT) sector has long been a barometer for economic resilience, and Primaris Real Estate Investment Trust (TSX:PMZ.UN) is no exception. Amid a turbulent retail landscape marked by shifting consumer habits and retail tenant restructurings, investors are scrutinizing whether Primaris is undervalued. A valuation analysis combining price-to-earnings (P/E) ratios, discounted cash flow (DCF) models, and sector positioning suggests the stock may indeed trade at a significant discount to its intrinsic worth, though risks persist.

Valuation Metrics: A Tale of Two Ratios

Primaris's trailing P/E ratio, a key valuation metric, varies across sources but consistently signals affordability. As of late 2025, the trailing P/E stands at 12.04, 11.61, or 13.81, depending on the reporting period. These discrepancies likely reflect differences in data sources or the inclusion of seasonal factors. Meanwhile, the latest twelve months (LTM) P/E ratio is reported at 22.4x, a figure that, while higher, still lags behind the North American retail REIT industry average of 23.9x and the peer average of 17x. This suggests Primaris is trading at a discount relative to both its historical performance and its sector.

The DCF model, which estimates intrinsic value by discounting future cash flows, further reinforces this narrative. According to the Simply Wall St model, Primaris's fair value is approximately CA$39 per share, implying the stock is trading 60% below its intrinsic worth as of 2025. At a current price of CA$16.53, the gap between market price and estimated fair value is striking. This disconnect may stem from overly conservative assumptions in the DCF model or an underappreciation of Primaris's long-term cash flow potential.

Retail Sector Headwinds and Strategic Resilience

Primaris's exposure to the retail sector has been a double-edged sword. The disclaimers of all remaining Hudson's Bay Company (HBC) leases in 2025 led to a 3.7% vacancy rate across its portfolio. However, the company has responded proactively, securing new leases at three locations and acquiring the Promenades St-Bruno mall in Montreal to diversify its tenant base. These moves signal adaptability in a sector where e-commerce and shifting consumer preferences have disrupted traditional retail models.

Despite these challenges, Primaris has maintained strong operational performance. In Q3 2025, funds from operations (FFO) per unit rose 5.7% year-over-year to $0.443, and committed occupancy reached 92.8%. The Trust also increased its distribution by 2.3% to $0.88 per unit, underscoring its commitment to dividend sustainability. Such resilience is critical for REITs, where income stability is a primary draw for investors.

Dividend Sustainability and ESG Progress

Dividend sustainability remains a cornerstone of Primaris's appeal. With 86% to 88% occupancy projected for 2026, the Trust appears well-positioned to maintain its payout. Moreover, its environmental, social, and governance (ESG) initiatives-such as a 10% reduction in greenhouse gas emissions since 2022 and a 3-star GRESB rating- enhance long-term resilience. These efforts align with growing investor demand for sustainable real estate holdings and could mitigate risks from regulatory or market shifts.

Risks and the Road Ahead

While the valuation case for Primaris is compelling, risks remain. Retail sector headwinds, including the potential for further tenant bankruptcies or declining foot traffic, could pressure occupancy rates. Additionally, the DCF model's assumptions about future cash flows may not account for abrupt economic downturns or prolonged retail sector contraction. Investors must weigh these risks against the Trust's strategic agility and current valuation.

Conclusion

Primaris Real Estate Investment Trust appears undervalued on both absolute and relative terms. Its P/E ratio lags behind sector averages, and DCF models suggest a substantial upside if the market re-evaluates its cash flow potential. While retail sector challenges persist, the Trust's operational performance, dividend growth, and ESG progress provide a buffer against headwinds. For investors with a medium-term horizon and a tolerance for sector-specific risks, Primaris offers an intriguing opportunity to capitalize on a potentially mispriced asset.