Real estate investment trusts are in a sweet spot.
After being beaten up in the 2008 global credit crisis, REITs are rebounding as the economy recovers. Thanks to low interest rates, they can borrow easily and refinance debt at lower rates. The sector is gaining additional momentum as investors search for yield and seek steady payouts in a trust sector that is shrinking.
With some REITS at or near 52-weeks highs, does the sector still have legs? We asked three fund managers to describe their outlooks and name two Canadian REITs they like.
Charles Dillingham, a manager with Morguard Financial Corp.
Mr. Dillingham doesn't anticipate big gains from REITs, but he continues to stay fully invested.
"It's still a good source of income..," said Mr. Dillingham, who runs CIBC Canadian Real Estate Fund. "There are REITs that are still yielding close to 8 per cent."
The risk is that interest rates will rise and REITs will no longer be able to borrow at low rates. But, he said, "at the moment, there is no indication of interest rates rising."
Dundee REIT : This REIT, which owns office and industrial properties, has raised money, diversified its holdings of office space away from Alberta and reduced its payout ratio to around 100 per cent, he said. "Dundee REIT has been lagging behind the others, but is just starting to get going again."
Artis REIT : Artis, which holds retail, commercial and industrial properties mainly in Western Canada, has been raising money and diversifying, he said. Its payout ratio is now below 100 per cent, and it will get a lift from being added to the S&P/TSX composite index on Sept. 20.
Leslie Lundquist, manager with Bissett Investment Management
Ms. Lundquist is more cautious on REITs after their recent surge.
"You can't be in the sweet spot forever," said the manager of the Bissett Income Fund, which invests in REITs and income trusts. "We think in many cases they are overvalued."
REITs are back near their previous highs in late 2006 and early 2007, said Ms.Lundquist, who has reduced the REIT weighting in her fund to 12 per cent from 17 per cent earlier this year.
"It is not that we are concerned that the companies will run into trouble," she said. "They will continue to operate very well, but we are concerned about valuation levels."
Cominar REIT : It owns office, retail and industrial properties mainly in Quebec. "It is a little less expensive than its peers because it is not quite as large and well known as the large-cap REITs," she said. "We really like the management, which has a big personal stake (about 20 per cent) in it."
Northern Property REIT : It holds mostly housing properties in Northern Canada, where there tends to be a stable tenant base consisting of many government workers, Ms. Lundquist said. It also has a strong management team that takes a conservative approach to distributions and debt.
Dennis Mitchell, manager with Sentry Investments
Mr. Mitchell is still fairly bullish on the real estate sector.
"I think investors are still chasing yield," said the manager of the Sentry REIT Fund. "You have to compare [REIT distributions]to what they can get out of banks, utilities and bonds. In that type of comparison, real estate still looks compelling."
REITs aren't necessary ahead of themselves, he said. But analysts are having to look further forward, basing their target prices on projected earnings two years from now. "Based on 2011, REITS are fairly to slightly overvalued. Analysts looking to 2012 will say the universe is fairly valued."
TransGlobe Apartment REIT : This REIT, which went public in May, trades at favourable valuations compared with peers such as Boardwalk REIT and CAP REIT, he said. It has a payout ratio of 92 per cent, yields over 7 per cent and trades at 12 times free cash flow.
Dundee REIT : This REIT has had a great run, but still yields around 8 per cent, he said. The risk is its huge exposure to Calgary office space, although the trust has been buying assets in the Toronto and Ottawa office market.