Canadian REIT’s have been unfairly battered, bruised and abused and are the cheapest that I have ever seen. With all the taper fear off the table and the 10-year Canada bond yield backing off from panic levels, REIT’s should trade much higher here. With low interest rates as far as the eye can see, good quality Canadian REIT’s offer one of the best sources of stable income with the potential for significant capital gains.

There is absolutely no reason for a good quality Canadian REIT to have a distribution yield in excess of 6% in this environment. As the economy improves and more retailers enter the Canadian market, rents have no choice but to go higher which can lead to higher distributions. As well, the Canadian population continues to swell thanks to immigration which means a strong need for rental properties. As the political craziness continues in the U.S., overseas investors have to see Canadian real estate as a safer haven.

All it takes is a basic understanding of math and a spreadsheet to understand that Canadian REIT’s should be buying back their stock as opposed to building or buying a new property. The incremental value of reducing the share float is more beneficial to the bottom line in an environment where cap rates are less than 6% and financing costs are 3.5%. In fact, it is probably best that REIT’s borrow money to buy each other. We expect M&A activity in the REIT sector to start any day now.

Our favourite REIT’s are H&R, Crombie, Northwest Healthcare Properties, True North Apartment and Morguard.  We are buying them aggressively for our clients here.

Disclosure: The author and household family members own shares in Morguard, True North Apartment REIT and Northwest Healthcare Properties REIT