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Real Estate Investment Trusts

After the Fall: Reconsidering US REITs

By Roger S. Conrad, on Dec. 31, 2013

Let’s make one thing perfectly clear: When it comes to real estate investment trusts (REIT), Canada offers the best value and highest yields for income-seeking investors.

Even better, Canadian REITs generally pursue conservative operating and financial policies relative to their peers south of the border, which provides a degree of protection during challenging periods.

And these companies pay their dividends in Canadian dollars, giving US investors an opportunity to diversify their currency exposure and hedge against future inflation.

However, shares of some US-listed REITs have retreated of late, reflecting concerns that rising interest rates will increase their borrowing costs and erode the value of the dividends these names pay to shareholders.

This specious argument hinges on the assumption that REITs are effectively substitutes for bonds and other fixed-income securities–a simplification that overlooks the potential for a strengthening economy to accelerate earnings and dividend growth. (See What’s Rate-Sensitive and What’s Not.)

Fortunately, this flawed assessment gives investors an opportunity to add some formerly high-flying names at favorable valuations.

Since May 22, 2013, the 135-member Bloomberg North American REIT Index has tumbled by almost 14 percent. And on a year-to-date basis, this index has generated total return of 2.7 percent.

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