The yields on Canadian REITs (Real Estate Investment Trusts) are excellent. The corollary is that, excluding distributions, Canadian real estate investors have not done very well over the last several months. Residential property is a key driver for the entire sector, and it has become highly leveraged. Owners are indebted and there is the risk of a property-price bubble burst. The threat of increased interest rates and an economic recovery which would rely on exports - the governments and consumers are not spending - has dampened investment enthusiasm in interest-rate sensitive investments, such as REITs, former Income Trusts (high dividend paying securities) and preferred shares (particularly perpetual preferred shares).
The impact to REIT investors has been substantial. The prices of these securities are down. That said, the distributions continue to roll-in.
My previous article on the topic - published at the end of August 2013, proposes that we buy these REITs as a contrarian strategy, and provided background information. Since then, the real estate market in Canada has been flat. The Canadian REIT fund TSX:XRE (not available on US exchanges) shows the trend since the summer:
This provides long-term, income-oriented investors with risk appetite, the opportunity to buy high-yielding (often micro-cap) REITs at "bargain basement" prices, and "sky-high" yields.
The investment thesis remains unchanged.
Many Canadian REITs have leveraged the opportunity of low interest rates to refinance existing mortgages; issue preferred shares, convertible debt, and long-term debt; and, expand their portfolios by buying more Canadian and U.S. properties. The various forms of financing tend to be for long terms, and at low rates...
REITs are often low-growth, and typically delivering the most of their returns in the form of higher yields. The long-term, low-rate financings should enable Riocan (and many other Canadian REITs) to generate a stream of high income and distributions, regardless of whether the Bank of Canada increases interest rates by 0.25%.
Moreover, long-term investors have not only enjoyed Canadian Dollar diversification and a high yield, but also benefited from a degree of price appreciation - again TSX:XRE demonstrates that if you bought-in any time before 2011, you are probably price-neutral (or ahead), and received a 6%-plus annual distribution.
The table is an updated list of Canadian REITs (and one mortgage company) - the ones that I have found that trade in the U.S. - that pay dividends in excess of 8%.
Btb Real Estate Invt
Dundee Real Est TR
Dundee Industrial REIT
Dundee International REIT
Inn Vest Rl Est Inv
MCAN Mortgage Corp (Not a REIT)
Northwest International Healthcare
Partners Real Estate
Retrocom Midmkt REIT
Note: The data is courtesy of Barchart.com, except for the yields, which are from CIBC Investors Edge (a Canadian discount brokerage).
No investment is risk free, but many Canadian REITs are yielding above 8% in a 1% risk-free (Canadian bonds) environment. A comprehensive list, with descriptions, is in this series of articles.
It is worthwhile to comment on a few of these "high-yielders":
- Dundee REIT - $3B market capitalization makes it one of the larger Canadian REITs, and most of its assets are in (desirable) Western Canada. Smart, growth-oriented management, with a debt-to-capital ratio at a 5-year low. With an 8% yield, it is my largest REIT holding.
- Dundee Industrial REIT - Since being spun-off by Dundee REIT in October 2012, it has grown from 6.1 million square feet to 15.7 million square feet. The market capitalization is only $450M.
- Dundee International REIT - If you want exposure to Germany's real estate, without Euro exposure or German withholding taxes, this $1B REIT is one alternative.
- Partners Real Estate - The external manager became insolvent - after a big proxy fight with the REIT management - so they are moving to an internal management model. I do not particularly like externally-managed REITs, so view this as a long-term advantage. The risk is that they have some major refinancing coming up.
- Retrocom Midmarket REIT - In secondary markets in Ontario. I suggest that these are less prone to be in trouble (when compared to the Metropolitan Toronto Area) should the market fall.
I continue to add to my positions on dips (on down days, these securities trade within a few percent of their 52-week lows). My belief is that the rise in interest rates will not devalue real estate securities substantially below the current level.
My largest industry holding continues to be Canadian real estate, as you may have concluded from the disclosure of my positions. Tax selling season is a great time to add to a high-yield portfolio. I continue to invest (and add to) these long-term, high-yielding, tax-deferred, securities. Good luck with your investing strategy, and happy holidays!
Disclosure: I am long OTC:DRETF, OTC:DREUF, OTC:DUNDF, OTC:IVRVF, OTC:NWHUF, OTC:GCDAF, OTC:PTSRF, OTC:RTRCF, OTC:GCDAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.