Hunting For Value In The REIT Market: Look North At Canadian REITs

by: Brad MacIntosh


Canadian REITs are mid-cap relative to US REITs: Value and dividend yield are evident.

Granite (GRP.U) is an industrial REIT that has automotive giant Magna (MGA) as its tenant.

CAPREIT is a Canadian Apartment REIT that offers dividend income and value.

I used stock price correlation analysis as a technical tool to evaluate diversification among REITs.

My interest in REITs comes after years of owning a rental property. In both cases, you can build income if you are patient and equally important if you pick quality investments (or good tenants!).

As an investor in Canada there is a tax advantage to buying Canadian REITs because of the way that dividends are taxed on domestic stocks. So that is where I started my search. But I looked across the border at US REITs as well for comparison. Mostly I assumed the valuations were not good enough to mix the US REITs into my portfolio (and incur higher taxation on the foreign dividends). It would be nice to pick up the retail REIT Realty Income Corp. (NYSE:O); It's often talked about on Seeking Alpha and pays a nice dividend (4.17%).

The table shows 12 Canadian REITs with Market Capitalization over a $1 Billion (Canadian dollars: currently $1 CAD = $0.76 US). For comparison, the table also lists the top 12 holdings in the Vanguard REIT Index ETF (NYSEARCA:VNQ). Many of these REITs are within 1-2% of their respective support levels, which is something I look for when deciding on a purchase.

Canadian REITs Ticker %Strike
Price Annual
Yield (%)
Cap (Billion)
P/FFO Industry
RioCan REI.UN OTCPK:RIOCF 0.5 26.2 26.33 1.41 5.36 8.8 15.67 REIT - Retail
H&R REIT HR.UN 2.8 22.75 23.41 1.35 5.77 6.54 12.07 REIT - Diversified
Smart REIT SRU.UN 3.6 32.04 33.25 1.60 4.81 4.51 15.83 REIT - Retail
Canadian Apartment Properties REIT CAR.UN OTC:CDPYF 5.9 30.25 32.14 1.22 3.80 3.96 20.09 REIT - Residential
Canadian REIT REF.UN 5.3 46.7 49.31 1.80 3.65 3.52 15.03 REIT - Diversified
Allied Properties REIT TSE:AP.UN OTCPK:APYRF 3.2 34.6 35.74 1.46 4.09 3.05 16.47 REIT - Office
Chartwell Retirement Residences CSH.UN OTC:CWSRF 1.8 15.46 15.75 0.55 3.49 2.91 19.44 REIT - Healthcare
Boardwalk REIT BEI.UN OTCPK:BOWFF 1.2 43.96 44.51 2.04 4.58 2.33 15.67 REIT - Residential
Granite REIT GRT.UN GRP.U 18.2 37.5 45.82 2.30 5.02 1.95 13.24 REIT - Industrial
Dream Office REIT D.UN OTC:DRETF 11.7 16.86 19.09 0.75 3.93 1.73 11.43 REIT - Office
Milestone Apartments REIT MST.UN 16.7 18.16 21.8 0.65 2.98 1.37 20.37 REIT - Residential
Pure Industrial REIT TSE:AAR.UN OTCPK:PDTRF 13.4 5.05 5.83 0.31 5.32 1.17 14.58 REIT - Industrial
US REITs Ticker %Strike
Price Annual
Yield (%)
Cap (Billion)
P/FFO Industry
Simon Property Group Inc. SPG 0.2 180.76 181.14 4.71 2.60 58 14.9 REIT - Retail
Prologis Inc. PLD 2.1 49.98 51.05 1.76 3.45 27 negativeFFO REIT - Industrial
Welltower Inc. HCN 2.2 68.4 69.95 3.48 4.97 25 16.2 REIT - Healthcare
Equinix Inc. EQIX 1.0 369 372.73 8.01 2.15 27 36.4 REIT - Data
Ventas Inc. VTR 5.0 61.67 64.9 3.10 4.78 22 15.7 REIT - Healthcare
AvalonBay Communities Inc. AVB 4.0 175.47 182.84 5.69 3.11 25 22.1 REIT - Residential
Equity Residential EQR 3.6 61 63.26 2.02 3.19 23 21.5 REIT - Residential
Boston Properties Inc. BXP 5.8 127.66 135.56 3.00 2.21 21 20.2 REIT - Office
HCP Inc. HCP 4.2 30.75 32.11 1.48 4.61 15 13.4 REIT - Healthcare
Vornado Realty Trust VNO 12.0 95.8 108.84 2.84 2.61 21 14.2 REIT - Diversified
Realty Income Corp. O 2.2 59.2 60.56 2.53 4.17 15 21.0 REIT - Retail
Federal Realty FRT 0.1 136.56 136.76 0.04 2.87% 10 23.91 REIT - Retail
Sources: Stock price was pulled from Google Finance; Support Levels are estimates from TD Waterhouse; Price / Funds from Operations ratios were calculated from SP Capital

From the table, is it possible to say which REITs are best? I am sure that others could educate me on this - but I think it is interesting to look at both price to funds from operation (P/FFO) and dividend yield. The blue point with the super high P/FFO is the only Data REIT.

Guess what else this graph shows? It seems to suggest that Canadian REITs are better valued. The red points (CDN) tend to be lower down - low P/FFO - and further to the right - higher dividend - compared to the blue points (USD). I have only considered 12 CDN vs. 12 USA REITs but they were sensible choices (which country scores better... this is going to turn into a discussion on hockey, isn't it?!).

Focusing on Canadian REITs you might not know

If you are looking for yield and low risk then picking RioCan (RIOCF or REI.UN.TO) - the largest REIT in Canada - would be a solid way to get exposure to the Canadian REIT market. RioCan focuses on retail and pays a 5.32% dividend. RioCan has a price to funds from operation of 15.

Moving down the table list is an industrial REIT, Granite REIT (NYSE: GRP.U or GRT.UN.TO): It's interesting because it is literally tied to the large cap automotive supplier company called Magna International (NYSE:MGA), its largest tenant. Buying this stock exposes you to the cyclical automotive sector but gives you extra stability. Magna has a high beta (beta=1.48), while Granite is low (beta=0.06).

Ultimately, the success of Granite will depend on how well Magna fares. But Granite is geographically diverse with plants in the US, Canada and Europe. The dividend yield for Granite is currently just above 5%, which is attractive and sustainable since the payout is less than 50%. Granite also has a low price to funds from operations (P/FFO = 13). This is lower than every US REIT in the table above!

REIT diversification through low correlation

From a technical analysis point of view, it is interesting to look at how much the REIT prices change over time and whether they change independently of each other. There is a mathematical way to describe how much two stock prices depend on another: it's called a correlation. Stocks in the same sector are likely to be correlated with each other. While stocks that bear no underlying common elements are less likely to be correlated. Correlation can be positive and negative, strong and weak. A hedge is one way to exploit negative correlation: You bet in favour of the stock that you think will go up and you short the stock that you think will go down.

Let's get back on track, however, and discuss the REITs. If you are looking for diversification among your REIT picks then you can consider different sectors (e.g. retail, industry, residential) but it may also be useful to look at their correlations amongst one another. For instance, an industry REIT could fluctuate in price in a manner that is highly correlated with a residential REIT. They may be different REIT sectors but if their prices move around in synchrony then that may influence your decision to own both stocks. A technical analysis would help to reveal they may be very similar, which could hurt your efforts at diversification.

To test this, I accessed the 5-year charts for these 12 REITs from Yahoo Finance using R software ( and calculated the correlation value between each of the CDN and US REITs. This makes a 12 by 12 grid of correlation values. (You only need to look at the top or bottom grid elements since they are mirror images of each other). I used a program called corrplot in R to make the graphic. If people are interested in this "do it yourself" calculations then I can share my work.

A high correlation value means that two stocks share a larger amount of variance: they are similar. A low correlation number means the price of the two stocks have no correlation: they are dissimiar. A positive correlation (blue numbers) means that the two prices increase and decrease together. A negative correlation (red numbers) means when one stock price goes up the other tends to go down. Correlation values range from -1 to 1. The correlation value of one stock with itself is 1 and does not mean anything.

If you look at the numbers in the first column, you can see that all RioCan is positively correlated with all 11 of the other stock prices. This is interesting because it would seem that the largest Canadian REIT has a way of pulling the other REITs around. We cannot say which stock is causing the mutual change in price - correlation is not causation - but we can observe trends.

I like RioCan but I am looking for 'statistical' diversification. Looking at the numbers in the first column, you can see that some REITs have lower correlation with RioCan. The ones that caught my attention are two residential apartment REITs (CAPREIT). It is comforting that picking these REITs would allow you diversification away from RioCan. That is after all what I am looking to do.

Dream Office Real Estate Investment Trust has the weakest correlation with RioCan, with a value in the first column of 0.13. Dream Office is also negatively correlated with many of the other REITs, which you can see if you look along the third from the bottom row. This tells me that Dream Office is doing its own thing, independent of the other REITs. In this case, that is not a good thing.

Dream Office looks to be a value trap, with a price drop since 2015 despite an 8% dividend yield. So I am not interested in that stock. Boardwalk REIT listed as BEI.UN, is unappealing because of their negative earnings per share.

The values in the grid are the individual correlation values between each of the different stocks.

If we focus on the apartment REITs (CAR.UN.TO and MST.UN.TO), we see they have a high positive correlation with each other, correlation = 0.91. I like both of these REITs. The high correlation effectively means that owning one of them is like owning both of them in equal parts! Over time, their stock prices tend to be very similar.

Therefore, deciding on which one to buy - i.e. which has better value - boils down to factors like dividend yield, payout ratios and debt. They have payout ratios that are ideal in my opinion (34% vs. 51%). Their yields are 3.65% vs. 2.98%. I am giving the nod to CAPREIT, which is why I picked up this stock a few months ago.

It helps that CAPREIT has a nice upward trending chart since 2012.

Chart for CAR-UN.TO since 2012

In conclusion, select Canadian REITs rightfully belong on your watchlist because the value is there compared to the well-known US REITs. A Canadian REIT also gives you exposure to the Canadian market in a way that is different from financials and energy stocks.

Buying a Canadian REIT can be low risk and could act as a currency hedge against a falling US dollar. I found that Granite and CAPREIT satisfy my desire for within-REIT diversification. They can go along with the largest retail REIT (RioCan) to fill out a healthy portion of your portfolio. I am personally aiming to have 20% of my portfolio in REITs. Now I have some solid picks to choose from.

Disclosure: I am/we are long CDPYF, RIOCF, GRP.U.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.