Canadian REITs: Super Buys

12/06/2013 9:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times


Barely four years after surviving a historic credit bubble and real estate bust, US REITs continue to lever up, leaving little wiggle room in the event of another market shakeout. Against this backdrop, Canada's ultra-conservative REITs stand out, suggests Roger Conrad in Capitalist Times.

Not since 1990 have US REITs fetched such a high multiple in terms of book value per unit. In contrast, almost all the Canadian REITs in our table trade near, or at a discount to, their book value. Here's a look at two super buys.

Dundee Real Estate Investment Trust (TSX:D-UN) (OTC:DRETF) have given up 22.8% of their US-dollar value this year. However, the stock's disappointing performance doesn't reflect a corresponding deterioration in the trust's underlying business. In fact, the office and industrial REIT remains solidly profitable.

Although market sentiment toward this laggard won't recover overnight, the stock's current yield of 7.8% rewards investors for their patience.

And Dundee REIT's moderate payout ratio, steady occupancy rates, and strong balance sheet limit the risks of holding and waiting. And the stock trades at 0.79 times book value.

Whereas Dundee REIT focuses on larger cities, Northern Property Real Estate Investment Trust (TSX:NPR-UN) (OTC:NPRUF) owns primarily residential income-producing properties in Alberta, and the Nunavut, and Northwest Territories—remote areas where the firm is often the only game in town.

In recent quarters, the trust has faced the challenge of redeploying the proceeds from the divestment of its senior-housing facilities—a move that the firm made to maintain its tax-advantaged status.

Although the REIT faces its fair share of challenges, the trust has returned to dividend growth and continues to deploy the proceeds from the sale of its senior-housing facilities.

From a tax standpoint, we note the Canadian government withholds 15% of the dividends that these REITs pay to US investors, though you can recover this amount by filing a Form 1116 at tax time. Investors who hold these stocks in an IRA or other tax-advantaged account will not be able to recoup this withholding.

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