Canadian REIT Trade Opportunity

by: Chris Damas

Before I started my investment career in the mid-1980s, I was told that out of every ten millionaires, nine made their money in real estate.

Only one made it in the stock market, so of course I chose to become a stock broker. I guess I wanted the challenge.

Ironically, my first really big score in the market was in real estate stocks.

As Canadian and U.S. commercial real estate rose from the ashes of a terrible early 1990s crash, you could buy good quality operators such as Bentall, Oxford and Tridel, for a fraction of what they had previously traded for.

I was active in Canadian REIT stocks after the 2009 bottom, sensing a similar opportunity. Many public commercial real estate companies have been turned into Real Estate Investment Trusts (REITs) providing investors tax advantages. I bought several of these but did not hold in most cases. But I have seen them rise nicely, up roughly 100% in the case of Calloway and Dundee. However, for the past few months, they have been slumping in price.

Several popular analysts in the sector have said the group is now "fully-valued" and not worth buying. I beg to differ.

Over the past three years I have followed closely Artis REIT (OTCPK:ARESF), Cominar REIT (OTC:CMLEF), Calloway REIT (CWYUF.PK), Dundee REIT (OTC:DRETF) and RioCan REIT (OTCPK:RIOCF).

You can see the yields of these five REITs sector currently offer as much as almost 5% over the 10-Year GOC bond (1.85%).

However, that isn't really the relevant benchmark. You should compare the REIT yields to corporate debt yields of comparable quality.

Luckily, these REITs have issued convertible or straight debt, so a comparison is relatively straightforward. In most cases the REIT unit is offering more yield than the same company's comparable debenture.

That would seem to discount the growth potential of the equity versus the debentures, and I might add most of the CV debs are out of the money.

Part of the reason for the discount on the units is that the REITs have been serial issuers of new units, as they have bought more real estate over the past three years or so. They have financed part of these deals by raising funds with more units. Generally, the REITs have not raised the monthly distribution in spite of higher rents and lower interest rates on mortgage financing, because they have been net users of capital.

What I think will change, is that the capitalization or "cap" rates on Canadian commercial real estate is generally now too low (think net operating income multiple too high) to make buying and issuing units accretive.

Hence, if you assume the REIT managements are rational, they should stop buying real estate, and actually start divesting some of their non-core portfolios. Recently, Calloway REIT sold 3 malls for $60 million in this regard.

5 Canadian Real Estate Investment Trusts


Recent Price

Monthly Dist.

Adj. Price



Artis $16.04 9.0 cents $15.95 6.77% 87.3%*


$23.46 12.0 cents $23.34 6.17% 94.7%
Calloway $28.06 12.9 cents $27.93 5.54% 91.7%
Dundee $36.56 18.3 cents $36.38 6.04% 90.0%
RioCan $26.80 11.5 cents $26.68 5.17% 101.5%

* Artis reports FFO (Funds From Operations per unit) whereas the others report AFFO (Adjusted Funds From Operations). Payout is the percentage of Q2 2012 FFO or AFFO paid out.

These REIT's all go "ex" their distributions on October 29. The distributions are received mid month. I believe this is a good buying opportunity to obtain a solid tax-deferred high yield investment for income oriented investors.

Disclosure: I am long OTCPK:ARESF, OTC:CWYUF, OTC:CMLEF, OTC:DRETF, OTCPK:RIOCF. 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.