FOCUS: REITs
Top Picks: CAP REIT, Flagship Communities REIT, Allied Properties REIT
MARKET OUTLOOK:
The theme of the real estate investment trust (REIT) market today is normalization. REITs and commercial real estate are showing signs of stability and slow improvement despite a volatile macro environment. When interest rates were near zero, this was not normal, and it caused abnormally high real estate pricing. Similarly, the massive immigration increase was not normal and caused apartment rents to rise unnaturally. COVID-19 was not normal in the way that stores were forced into bankruptcy (bad for malls) and we all worked from home (bad for office) and shopped online (positive for warehouses).
The unwind of these extremes and the return to a new version of “normal” has been painful but necessary, and we have seen the strongest companies adapt and become even better. Of course, then came U.S. President Trump and the tariff war with Canada and the rest of the world. So much for normal. It is impossible to predict how this will play out, however REITs are inexpensive and offering very attractive yields, the portfolios are of very high quality, leasing is improving, costs are moderating, and borrowing costs are stable. In other words, despite the chaos of the world, Canadian REIT fundamentals are surprisingly normal. As the news from our southern neighbours gets stranger and less predictable, a little normality may be just what we need. We remain cautiously optimistic.
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TOP PICKS:
Canadian Apartment Properties REIT (CAR-U TSX)
CAP REIT is the largest, most liquid apartment REIT in Canada. It has been selling non-core properties and using the proceeds to pay down debt, buy back stock, and purchase newly built apartment buildings that are much more efficient to manage than older properties. The balance sheet is strong, the portfolio is improving, there is some growth in earnings, yet the stock is near all-time low.
Flagship Communities REIT (MHC-U TSX)
(Note: Distributions to unitholders are paid in USD even on the TSX listing)
Flagship is a unique name as it is a Canadian REIT, but all its properties are mobile-home communities in the U.S. Trailer parks are the most affordable living option for an American family making Flagship a very defensive name in uncertain times. Flagship has many growth opportunities via acquisition or by adding additional homes to their existing properties which should translate into strong earnings per share growth.
Allied Properties REIT (AP-U TSX)
Yielding around 12 per cent, Allied is a leading office REIT here in Canada. The pressures facing the office market are well known, and as a result Allied’s stock price has fallen along with fundamentals. The office market, however, is showing signs of a bottom in Toronto, Montreal, and Vancouver where Allied has its properties. While the recovery will take a few years, yield investors buying now should do all right.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CAR-U TSX | Y | N | Y |
| MHC-U TSX | N | N | Y |
| AP-U TSX | N | N | Y |
