Toronto Star

How REITs are defying the odds

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Sometimes things don’t always go according to plan in the investing world.

Take real estate investment trusts (REITs) for example. They’re interestse­nsitive securities that are supposed to tank when rates rise. But so far at least, they haven’t got the message.

As of the time of writing, the S&P/TSX Capped REIT Index was ahead 3.1 per cent for the year. Contrast that with another interest-sensitive sector: utilities which is down 10.8 per cent so far in 2018.

REITs are even outperform­ing the S&P/TSX Composite, which is off 1 per cent year to date.

What’s going on? This is a sector that is supposed to be being battered, yet it’s one of the best performers on the Toronto Exchange in 2018.

For starters, the industry is rapidly changing its focus. In years past, Canada’s major REITs were oriented to shopping malls with big anchor clients like Sears and The Bay. But e-commerce has changed the whole nature of the shopping experience.

Department stores in both Canada and the U.S. are closing down, leaving their landlords scrambling to fill vast empty spaces.

RioCan (REI.UN), once the largest shopping mall REIT, has seen its price drop from more than $30 in mid 2016 to the $24 level today. This was despite recently raising its distributi­on for the first time since 2013, albeit by a modest 2.1 per cent. In response to the growing pressure on malls, the company is divesting some of its secondary market holdings and switching its emphasis to mixed-use properties in Canada’s top six markets.

But switching gears in the business world takes time. The most successful REITs right now are those with assets in areas of high demand.

Apartments are an example. As home prices rise (albeit at a slower rate) the demand for rental properties increases. One beneficiar­y is Northview Apartment REIT (NVU.UN), which is currently trading near its three-year high. Northview owns about 25,000 residentia­l suites and 1.2 million square feet of commercial space in more than 60 markets across eight provinces and two terri- tories. It recently reported strong first quarter results that showed a year-over-year increase of 11 per cent in adjusted funds from operations (FFO) per share. FFO is the most widely used measure of a REIT’s financial performanc­e.

Industrial REITs are another area of high demand. These invest primarily in commercial land and buildings on the outskirts of major cities, which often were purchased at bargain prices. They are experienci­ng demand growth thanks to a strong economy and the increased need for warehouse space in response to the e-commerce boom.

Earlier this year, Blackstone Property Partners, a big U.S, company, saw the opportunit­y and took over Canada’s Pure Industrial REIT in a $3.8 billion deal.

Among the remaining REITs of this type on the TSX are Dream Industrial REIT (DIR.UN), which is trading at close to a five-year high, and WPT Industrial REIT (WIR.U), which focuses on warehouse and distributi­on facilities in the U.S.

WPT is just one of a growing number of REITs that are based in this country but which invest primarily abroad. For example, Dream Global REIT (DRG.UN), which hit a new all-time high last week, invests in commercial real estate in Europe, mainly Germany and the Netherland­s. Granite REIT (GRT.UN), which also reached a new high last week, owns 92 properties (34 million square feet) of leasable space in the U.S., Europe and Canada.

On top of their strong performanc­e, these REITs offer very attractive yields for income- oriented investors. Granite currently pays 5.2 per cent, Dream Global is at 5.1 per cent, and WPT Industrial offers 5.4 per cent. Dream Industrial is even higher at 6.4 per cent while Northview Apartment comes in at 6 per cent.

As well, REITs, by the nature of their business, are relatively immune to the looming trade wars — unless, of course, they escalate to the point the world is plunged into a recession. Then everyone gets hurt.

But for now, REITs are one of the few bright spots on the TSX. Rising interest rates may eventually catch up to them, but so far they’re defying the odds.

Gordon Pape is editor and publisher of the internet Wealth Builder and Income Investor newsletter­s. His website is buildingwe­alth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates

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Gordon Pape

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