Real Estate Investment Trusts

Canadian REITs: The Price is Right

Three factors underpin our bullish outlook for our favorite Canadian REITs relative to their peers south of the border.

• Value: Not since 1990 have US REITs fetched such a high multiple in terms of book value per unit. In contrast, almost all the Canadian REITs in our table trade at their book value or at a steeper discount.
• Safe, High Yields: Show me a US REIT yielding in the neighborhood of 6 percent, and I’ll show you an endangered dividend. All but three Canadian REITs that made our list pay out that much or more--and two-thirds of these names have raised distributions in the past 12 months.
• Growth: Concerns that slowing economic growth in Asia’s emerging markets will stall the Canadian economy have yet to weigh on results in the REIT sector. Several names in our table grew their cash flow at a solid clip in the third quarter, suggesting that dividend increases could be on the table for coming months.

More important, the 14 Canadian REITs in our table sport an average occupancy rate of 96 percent and enjoy rising rates and manageable debt levels relative to their market capitalizations. And with minimal debt maturities through the end of 2014, near-term refinancing needs remained limited.

An average payout ratio of 72.6 percent is the lowest in several years and has enabled these REITs to grow their dividends modestly over the past 12 months. These REITs pay their monthly dividends in Canadian dollars, a currency that’s protected against inflation by the country’s commodity exports.

Results for the quarter ended Sept. 30, 2013, suggest that there’s more upside to come for Canada’s REITs.

Most of the names in our list reported an increase in average rents but emphasized that their average rates remains below prevailing market levels.

And occupancy rates have remained steady, even for REITs that own properties in areas where economic activity has cooled. Access to low-cost financing has also enabled our favorites to pursue the best expansion opportunities.

All these trends add up to rising cash flow and dividends.

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