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 Myth-Busting: Rising Interest Rates and Dividend-Paying Stocks.)
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.
A handful of high-quality REITs are worth a look after their recent pullback.
Source: Bloomberg, Capitalist Times Premium
The five REITs highlighted in our table have a long history of solid operating results and stand out as the cream of the crop within their subsectors.
Although Prologis (NYSE: PLD) and Weingarten Realty Investors (NYSE: WRI) slashed their dividends during the recent financial crisis, scale and a renewed conservatism should protect both names from future weakness.
Meanwhile, the other three names on our shopping list-HCP (NYSE: HCP), Mid-America Apartment Communities (NYSE: MAA) and W.P. Carey REIT (NYSE: WPC)-continued to hike their dividends throughout the credit crunch and real estate market implosion.
Rather than painting these REITs with a broad brush, investors should remember that each subsector entails its own risks and potential rewards.
The fortunes of REITs that own office, retail and industrial properties tend to fluctuate with economic growth, while names that specialize in apartments and health care facilities historically hold up the best during downturns-though investors also need to pay attention to housing affordability and the Affordable Care Act's implications.
Here's a rundown on the risks and opportunities embedded in the Fab Five REITs highlighted in our table.
Of the REITs discussed in this article, Prologis stands to benefit the most from accelerating economic growth at home and abroad.
The company, which owns almost 3,000 distribution and logistics facilities spread across 21 different countries, this month announced that Norway's sovereign-wealth fund had purchased a 45 percent stake in its US-based warehouses for US$450 million.
This marks the second joint venture that Prologis has inked with the fund. Last year, the REIT sold a 50 percent interest in its portfolio of European warehouses to the sovereign-wealth fund. Both partners plan to add opportunistically to these portfolios in coming years.
Prologis also stands to benefit from Prime Minister Shinzo Abe's efforts to stimulate Japan's economy and expand international trade; the REIT manages 42 properties in the island nation, which is its second-largest market.
Fitch Ratings recently reaffirmed Prologis' BBB (stable outlook) credit rating, citing the growing cash flow generated by its industrial properties, reliance on in-place rates, solid occupancy rate and unmatched geographic and customer diversification.
Although these positives don't offset the inherent volatility in Prologis' economy-sensitive industrial operations, canny acquisitions and global economic growth have helped the REIT to generate three times its 2009 revenue.
The company's dividend has remained flat for almost five years, but the firm is approaching a point where raising its quarterly payout could be an option.
Weingarten Realty Investors
Weingarten Realty Investors, which owns and leases retail space in shopping centers throughout the US, has pruned its portfolio, refocusing on its core geographic markets and shoring up its balance sheet. This strategic shift comes on the heels of a 52.3 percent dividend cut during the 2008-09 financial crisis.
This strategic shift has paid off, with Weingarten Realty Investors growing its dividend by 5.4 percent over the past three years. In 2013 the REIT hiked its quarterly payout by $0.015 per share; the market expects the company to announce a similar increase when it declares its next dividend on Feb. 14, 2014.
With a portfolio of shopping centers in the Southwest, Weingarten Realty Investors benefits from a steadily growing population and strengthening economies in areas where energy production continues to boom.
Meanwhile, Weingarten Realty Investors expects to complete plans to high-grade its portfolio through acquisitions and divestments in 2015. This program has sharply reduced leverage the REIT's leverage and boosted occupancy rates.
At that point, management expects the firm to grow its funds from operations at an average annual rate of 4.5 percent to 6.5 percent-roughly in line with the REIT's recent rate of dividend growth.
W.P. Carey REIT
W.P. Carey REIT owes its elevated payout ratio and robust dividend growth over the past 12 months to its conversion from a publicly traded partnership to a real estate investment trust.
The company, which specializes in providing sale-leaseback financing to corporations, looks set to continue to grow its dividend per share by $0.01 per quarter in the coming year and earlier this month declared a special disbursement of $0.11 per share.
W.P. Carey REIT expects to close its merger with non-traded real estate investment trust, Corporate Properties Associates 16 - Global, in the first quarter 2014. We expect this deal to enable the trust to continue its unbroken string of 50 consecutive increases to its quarterly dividend.
Shares of W.P. Carey REIT have given up about 17 percent of their value since May 21, 2013, but look appealing for investors with a longer time horizon.
Shares of health care REIT HCP have tumbled by 32 percent since May 21, 2013, fueled by a wave of analyst downgrades and growing concerns about an increasingly competitive environment for mergers and acquisitions.
Nevertheless, the REIT appears set to boost its quarterly dividend by another $0.025 in late January 2014, which is on par with this year's growth rate.
CEO Lauralee Martin, who assumed the reins earlier this year, has refocused on optimizing the profitability of HCP's existing assets, as opposed to pursuing acquisitions at any costs. Under Martin, the REIT has also sought to reduce its outstanding debt and interest expenses.
In the third quarter, the occupancy rate in HCP's senior-housing portfolio improved by 50 basis points from year-ago levels, to 85.5 percent. The REIT's re-hospitalization rate of 18 percent is also below the industry average-a testament to the quality of care that patients receive at its facilities.
We expect HCP's size ($2 billion in annual revenue) and conservative management to enable the REIT to benefit over the long term from an aging population and an industry that's ripe for consolidation.
Mid-America Apartment Communities
Arguably the most conservative pick from our Fab Five, Mid-America Apartment Communities draws rents from a high-quality portfolio of multifamily properties concentrated in the Sunbelt-an area with superior population growth.
The REIT has hiked its dividend by 18.7 percent since late 2010, including a 5.1 percent increase announced in early December 2013.
Nevertheless, shares of Mid-America Apartment Communities have slipped by about 16 percent since May 21, 2013, in part because of concerns about rising interest rates and fears that an uptick in housing starts in the Southeast could weigh on rents and/or occupancy rates. But neither of these worries has shown up in the REIT's bottom line.
Mid-America Apartment Communities' takeover of Colonial Properties Trust in an all-stock deal created the largest multifamily REIT in the Sunbelt and should be accretive within two years of closing.
Over the past four years, Mid-America Apartment Communities has grown its annual revenue by more than 60 percent and its funds from operations by 135 percent. Nevertheless, the stock price remains flat relative to where it was seven years ago.
With a dividend yield of 4.7 percent, Mid-America Apartment Communities rates a buy for income-seeking investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.