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Real Estate Investment Trusts

Canadian REITs: Big Yields and Undemanding Valuations

By Roger S. Conrad, on Dec. 29, 2014

The Nov. 20, 2013, issue of Capitalist Times Premium highlighted 14 Canadian real estate investment trusts (REIT) that sported an average dividend yield of 5.9 percent—a full two percentage points more than the Bloomberg North American REIT Index, a capitalization-weighted basket of 168 US trusts.

At the time, these Canadian REITs traded at an average of 1.08 times book value, well below the Bloomberg North American REIT Index’s price-to-book ratio of 2.15 times. (See Canadian REITs: The Price is Right.)

The valuation gap between US and Canadian REITs has widened in subsequent months.

Whereas most of the 19 Canadian REITs that highlighted in this article have either treaded water or headed lower, the Bloomberg North American REIT Index has rallied, shrinking its yield to 3.4 percent and expanding its book value to 2.67-to-1.

Check out this graph comparing the Bloomberg North American REIT Index’s year-to-date total return relative to the S&P/TSX Capped REIT Index, which tracks 15 of the Toronto Stock Exchange’s most prominent real estate investment trusts.

(Click graph to enlarge.)BBREIT vs SPRTRE YTD TRA

This divergent performance has also translated to the Lifelong Income Portfolio. US-listed REITs Digital Realty Trust (NYSE: DLR) and Mid-America Apartment Communities (NYSE: MAA) posting solid gains and our positions in Artis REIT (TSX: AX-U, OTC: ARESF) and Dream Office REIT (TSX: D-U, OTC: DRETF) in the red.

Roots of Underperformance

The Canadian dollar’s slide relative to the greenback—the loonie has tumbled more than 17 percent since its 2012 high—in part explains the S&P/TSX Capped REIT Index’s underperformance.

(Click graph to enlarge.)CADUSD 2-Yr History

In US dollar terms, this basket of 15 Canadian REITs has posted a total return of almost 1.2 percent thus far in 2014; in Canadian dollar terms, the index is up 10.6 percent.

Conditions in local real estate markets have also weighed on Canadian REITs, with concerns about overbuilding in Toronto and other major cities hitting the office segment particularly hard.

Meanwhile, REITs that own property in areas associated with oil and gas development in Western Canada have slipped amid concerns that the collapse in crude prices would hurt the local economy.

Solid as a Rock

The vital statistics for the 19 real estate investment trusts highlighted in “The REIT Stuff” paints a picture of an industry that should be able to ride out the aforementioned headwinds and at least maintain their dividends.

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