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Picking the right REITs to buy right now

Canadian real estate investment trusts are expected to average a 19 per cent return in 2016 – and some may be undervalued
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Canadian Apartment Properties Real Estate Investment Trust is Canada’s largest landlord – and expanding into Metro Vancouver where it bought 19 rental apartment buildings, including this Burnaby project. | Western Investor

Canadian real estate investment trusts turned mostly negative in 2015, with the overall sector down 4.6 per cent, lead by those with heavy exposure in Alberta.

This year - and next - will be different. Canaccord Genuity Corp. is estimating an average 19 per cent return for Canadian REITS in 2016.

Western Investor believes some REITs, especially tuned to the geographical and sectoral strong points in Canada’s commercial real estate, could do even better. 

Our picks are based on some assumptions for the economy over the next 12 months.

These include an expectation of continued low long-term interest rates, since mortgages are the single largest REIT expenditure. Also, capitalization rates will likely remain close to current levels and many Canadian REITs, particularly those weighted towards Toronto, Vancouver and U.S. cities, are currently trading at sizeable discounts to net asset value. 

In addition, we believe there will be notable takeovers in the REIT sector over the next few months as larger trusts seek to expand in the face of a low inventory of prime commercial property. 

These are Western Investor picks for REITS to consider purchasing this year.

Canadian Apartment Properties REIT: CAPREIT is Canada’s largest owner of rental apartments. With a market cap of $4.1 billion, its assets include more than 42,000 apartments and 6,443 land lease sites in 31 manufactured-home communities. The trust has 51 per cent of its units in Ontario and 22 per cent are in Quebec. Only 6 per cent are located in Alberta. We like CAPREIT because of its aggressive move into Metro Vancouver. Last year, CAPREIT closed on the acquisition of 19 properties with 919 suites in the Metro Vancouver for $170 million, a giant step into Canada’s top rental environment.

CAPREIT shares are up 7.7 per cent from a year ago. The company’s 4.1 per cent dividend has been hiked in each of the last five years. It also has a healthy blend of affordable, mid-tier and luxury rental suites.

Dream Industrial REIT: Dream Industrial REIT owns a portfolio of 219 predominantly small-bay industrial properties totalling 17 million square feet in primary and secondary markets across Canada. (Nearly five million square feet is in Alberta.) It has a market cap of $453 million.

Industrial fundamentals, even in Alberta, remain healthy and we expect the REIT to maintain occupancy while achieving modest rental rate increases on renewals. 

Dream Industrial’s annualized distribution of $0.70 per unit equates to a 9.7 per cent current yield. Dream is undervalued.  The REIT is now trading in the $7.80 range, with a target of $9.00.

Killam Apartment REIT: Killam owns nearly 14,000 rental apartments, about 5,000 manufactured-home sites and a portfolio of commercial property. It has $1.9 billion in total assets. Despite its exposure in Atlantic Canada, Killam has reported occupancy levels of nearly 96 per cent and same-property revenue growth of nearly 2 per cent. The company is on pace to generate $0.82 per share in funds from operations for 2016, putting shares at about 15 times earnings. It is currently trading in the $12 range, down from a 52-week peak of $13.30.

H&R Real Estate Investment Trust. With a current yield of 5.8 per cent, a payout ratio of less than 70 per cent of funds from operations, and ample liquidity, H&R is seen as a safe dividend play over the long term. We like its U.S. assets. H&R owns a one-third interest in 208 commercial properties in the United States and continues to expand its American base. Its residential portfolio consists of nearly 3,000 apartments in Texas, Florida and North Carolina. It also owns 50 per cent of a development in Long Island City, New York, that will include 1,871 luxury apartments and 15,000 square feet of retail space when it completes next year.

Pure Industrial REIT. Based in Vancouver, Pure Industrial REIT owns large industrial properties in major Canadian cities, primarily Toronto, Vancouver, Calgary and Edmonton. Its assets also include a portfolio of FedEx properties in the United States, which it has expanded through new developments. As of September 15, Pure Industrial was trading at $5.51, up 26 per cent from a year earlier.

Boardwalk Real Investment Trust. We realize that Boardwalk is seen as a long shot, since it is heavily vested in Alberta, where 60 per cent of its rental apartment units are located. In fact, the Calgary-based REIT is the most shorted stock in North America. But Boardwalk deals in mid-level apartments that remain in high demand – its Alberta portfolio vacancy level is 3.5 per cent - and it has been taking advantage of lower prices to acquire more Alberta units this year. 

Boardwalk has a respectable 4.48 per cent yield. Now trading in the $49 range, Western Investor rates Boardwalk a buy.