Updates On Our Canadian Top Picks

Something unique about High Yield Landlord is that we don't cover just US REITs, but also foreign markets.

Today, over 30 countries have adopted the REIT regime, providing a lot of opportunities for us to evaluate:

Our International Portfolio is optional and intended for investors who want greater diversification to boost their risk-adjusted returns.

Personally, I aim to invest at least 25% of my REIT portfolio in non-US markets. Some members may prefer to allocate a higher weight to International opportunities, while others may ignore them altogether. It comes down to your personal preferences, risk tolerance, and return objectives.

The goal here is to provide you with the information and tools needed so that you aren’t just limited to US markets. It will allow you to identify and research new investment opportunities in Canada, Europe, South America, Asia, and even Africa from the comfort of your home.

The Portfolio currently holds 19 positions, out of which 9 invest in Europe, 6 in Canada, 2 in Central/Latin America, 1 in the Pacific, and 1 in Africa.

In today's article, we give updates on our 6 Canadian Top Picks:

Northview Residential REIT (NRR.UN:CA)

We invested in Northview Residential REIT (NRR.UN:CA) just one and a half years ago, and it has already become a very successful investment:

Data by YCharts

And yet, it still remains cheap.

The Canadian apartment REIT is still trading at a 30% discount to its net asset value and just 9x its FFO, which is the lowest valuation in its peer group:

The discount to NAV is actually even bigger than it may look because its NAV is calculated based on a conservative 6.5% cap rate, whereas many of its peers use cap rates in the low to mid-5s. If it used a more aggressive cap rate, the discount to NAV would surge in the 40-50% range. Its non-core asset sales have even outperformed its own estimate of NAV, suggesting that its NAV is conservative.

I would also note that InterRent (IIP.UN:CA), which trades at the highest valuation in its peer group, just recently received a buyout offer from a private equity company, which further suggests that NRR must be undervalued at these levels:

Data by YCharts

Despite trading at a much lower valuation, NRR's properties have enjoyed some of the fastest rent growth in its peer group.

In the most recent quarter, its same-property NOI rose by another 6.5%, resulting in 28% growth in its FFO per share.

How many REITs do you know that are growing so fast and trading at such a low valuation?

I don't know any.

But there is a good reason for the low valuation.

The REIT has a lot of debt with a 64.7% LTV. This scares the market, especially considering that this is a very small REIT with a short operating history.

But you should note the following:

1) A 65% LTV is actually perfectly normal for private real estate investors.

2) The LTV is a function of the cap rates you use to value the properties. If you used a cap rate in the mid-5s, the LTV would drop to around 50%, which is far more conservative.

3) The REIT enjoys relatively long debt maturities, and its average interest rate is already quite high.

4) It retains about 25% of its AFFO and is in the process of selling non-core assets in order to gradually pay off debt. You can see this in the declining balance of its credit facility:

Therefore, we think that the risks are not as high as the market appears to think, and the upside could be significant as the REIT keeps growing and deleveraging, which could eventually earn it a higher valuation multiple.

While we wait, we also earn the highest dividend yield in the Canadian residential sector, and it is paid on a monthly basis.

Finally, shareholders can rest assured knowing that the management is acting in their best interest, given that the Chairman owns the entity that controls 28% of the equity in the REIT, and another trustee controls an entity that owns 22% of the equity in the REIT. They have a lot of skin in the game.

You can read our full investment thesis by clicking here.

RioCan (OTCPK:RIOCF / REI.UN:CA)