For five years and counting, US real estate investment trusts (REITs) have been the toast of Wall Street, producing 20 percent-plus annual returns like clockwork. They may keep up this remarkable streak a while longer. But in the second half of the decade, the best property plays in North America are likely to be Canadian REITs.

First and foremost, Canadian REITs present superior value to their counterparts in the US. After five years of powerful gains, most US REITs yield between 3 and 4 percent. That’s some 2 to 3 percentage points less than the yield paid by Canada’s highest-quality REIT, RioCan REIT (TSE: REI-UN; PinkSheets: RIOCF) and it’s barely half the yield on the average Canadian REIT.

Canadian REITs also trade close to net asset value, the value of their properties and cash less debt. They sell for 12 or fewer times their funds from operations (FFO), the best measurement of REIT profitability because it takes into account the tax advantages of owning property. In contrast, many high-quality US REITs trade at multiples of 15 times FFO or higher and more than twice book value. General Growth Properties, generally considered the bluest of REIT blue chips, actually trades at more than five times its book value.

Canadian REITs also offer considerably more growth potential than their rivals to the south. Long-term bull markets in natural resources spell trouble to the US economy. Just as in the 1970s, soaring oil prices are bringing rising inflation and unemployment.

In contrast, Canada was on a roll during the ‘70s and is starting to do the same this decade, after slumping during the ‘90s commodity bear market. Employment remains in a decided upturn, particularly in the red-hot energy patch. That’s already pushing up property values and rents for Canadian REITs. And as long as the resource bull market lasts, there’s a lot more to come.

Residential property-focused Canadian Apartment REIT (TSE: CAR-UN; PinkSheets: CDPYF) has been around since May 1997. During that time, it’s continued to add properties that boost cash flow, resulting in a 51-percent increase in dividends since inception. Current operating metrics are extremely solid, with occupancy rising to 98 percent of the total portfolio this summer. That’s up from 96.5 percent at the end of the second quarter (June 30) and a clear sign the REIT has chosen its assets well and is benefiting from an upturn in the residential rental market.

Apartment REITs have suffered as would-be renters have chosen to take advantage of low interest rates to buy homes. However, the cost of renting is now historically low relative to buying and the pendulum is starting to swing back. As a result, Canadian Apartment REIT’s occupancy should continue to rise, translating into increasing rents, cash flows and dividends moving forward. Management, in fact, recently stated it has “never been so confident” in the REIT’s future.
Buy Canadian Apartment REIT up to $13.

This Article is from the Fall 2005 Top 10 Special Report. Get the latest stock recommendations from other top financial experts today!  Request your FREE copy of the newest report from NewsletterAdvisors.com.  Click here.