In the June 2013 issue of Canadian Edge we profiled nine real estate investment trusts (REIT), including five Portfolio Conservative Holdings, in an In Focus feature titled The REIT Rout.

The call to buy Canadian REITs on June 7, 2013, doesn’t look particularly prescient at the moment.

Since then our five Portfolio REITs–Artis REIT (TSX: AX-U, OTC: ARESF), Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), Dundee REIT (TSX: D-U, OTC: DRETF), Northern Property REIT (TSX: NPR-U, OTC: NPRUF) and RioCan REIT (TSX: REI-U, OTC: RIOCF)–have generated an average total return in US dollar terms of negative 11.7 percent.

The S&P/TSX Composite Index (SPTSX) is up 2.7 percent from June 7 through Sept. 6, while the S&P 500 Index is up 1.6 percent.

But insiders are buying shares of all five, with insider holdings of RioCan up more than 20 percent over the past six months.

And the REITs are buying units, with Canadian Apartment Properties, Northern Property and RioCan all announcing normal course issuer bids since early July.

These are strong signs of management confidence in the health of their underlying businesses and that the rate-rise-related selloff is overdone.

A selloff of yield-focused equities is not a surprising result, as risk-averse investors once drawn to REITs, for example, return to risk-free assets such as government bonds that now look a little more attractive.

Over the long haul, however, historical data suggest REITs are able to perform well amid both rising and falling interest rate environments.

Rising interest rates and talk of cessation of the Fed’s extraordinary activities to keep them low indicate the US economy is returning to a more normal condition. This would almost certainly help the Canadian economy, as the North American duo still comprises the biggest bilateral trade relationship in the world.

Underlying operations for retail, industrial and office REITs actually stand to benefit from a return to long-term growth trends.

Theoretically, unemployment in both countries will decline and wages and disposable income will rise, thus allowing for increased consumer spending, with the knock-on effect of higher rents.

Of course longer-term shopping trends must be taken into account in the age of the Internet; investors must be selective when it comes to identifying REITs that own and operate properties occupied by retailers that still enjoy old fashioned foot traffic.

On the other side of this coin are REITs that own industrial properties used to warehouse all the goods bought and sold through websites such as Amazon.com and Zappos.com.

You need to be selective in this environment. The good news about REITs is that high yields are a sort of hedge against price declines: If you buy a high-yield REIT, any price decline will be mitigated by high income in the meantime.

If you’re looking for bargains in Canada, start your hunt with this month’s Best Buy selections EnerCare Inc (TSX: ECI, OTC: CSUWF) and ARC Resources Ltd (TSX: ARX, OTC: AETUF).

Follow up with our collection of high-quality REITs.

Northern Property REIT (TSX: NPR, OTC: NPRUF) highlighted second-quarter reporting season for our collection of REITs with the announcement of a 3.3 percent increase to its monthly distribution rate.

The first installment at the new rate of CAD0.13167, or CAD1.58 on an annualized basis, up from CAD1.53, will be made in October.

Northern Property reported second-quarter funds from operations (FFO) per unit of CAD0.57, up 7.5 percent on a continuing operations basis from CAD0.53 a year ago. Acquisitions completed during 2012 and developments completed during 2013 are starting to drive growth for the REIT and its unitholders.

Existing properties are also performing well, with same-door net operating income up 1.5 percent for the second quarter. Management noted that vacancies remain at higher-than-historical levels but have leveled off compared to the first quarter.

Northern Property’s plan is to continue to buy existing assets on a selective basis, with an eye on maintaining portfolio quality. Management noted that prices have begun to come down for assets that fit its profile, evidenced by the acquisition of 229 units in Fort McMurray, Alberta, that will close early in the third quarter at a price of CAD43.3 million.

The acquisition pipeline has improved, with 153 multi-family units under conditional contract for an aggregate purchase price of approximately CAD13 million that are expected to close in the third quarter.

Management described the distribution increase “as a sign of our confidence in our business fundamentals” and validation that Northern Property has “one of the healthiest balance sheets in the Canadian multi-family space.” It’s the seventh distribution increase since the REIT went public in June 2002 and the first since August 2010.

On July 29, 2013, Northern Property announced a normal course issuer bid that allows it to buy back approximately 3 million units through July 29, 2014, in light of management’s view that the recent interest-rate driven pullback in the unit price is overdone and has left the REIT’s units undervalued.

Northern Property, which is yielding 5.6 percent at these levels, is a buy under USD30.

Artis REIT (TSX: AX-U, OTC: ARESF), which owns and operates a diversified portfolio of office, retail and industrial assets, with a concentration in Western Canada, reported a 12.9 percent increase in funds from operations per unit to CAD0.35.

Same-property net operating income was up 3.1 percent, while mortgage debt as a percentage of book value declined to 45.4 percent as of June 30, 2013, from 47.3 percent as of Dec. 31, 2012.

Occupancy remained strong at 95.1 percent.

Management estimates market rents at June 30, 2013, are estimated to be 7.6 percent above in-place rents across the portfolio, compared to 8.9 percent at March 31, 2013. Today’s market rents for the 2013 and 2014 lease expiries are estimated to be 4.2 percent and 8 percent, respectively, above in-place rents. This gives Artis room for organic growth in rental income.

Property net operating income (NOI) is concentrated in higher growth western Canadian provinces of Alberta (38.6 percent) and British Columbia (9.5 percent).

The REIT is expanding into the US, which accounted for 20.1 percent of NOI during the second quarter. It’s a disciplined strategy, as management is taking advantage of a decline in the value of US commercial property values relative to Canadian values, a window of opportunity that won’t remain open for long. Total weighting of US properties in Artis’ portfolio won’t exceed 30 percent of pro-forma property NOI.

Artis REIT, which is now yielding 8 percent, is a buy under USD16.

Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF) reported revenues were up 22.7 percent through the first six months of 2013, generating a 23.3 percent increase in NOI. Same-property NOI was up 5.5 percent for the six-month period and up a very solid 7.1 percent in the second quarter.

Normalized FFO–management’s preferred measure of performance–were up 33.2 percent, as net FFO per unit rose 13.7 percent despite a 17 percent increase in units outstanding. The payout ratio based on normalized FFO improved significantly to 73.2 percent for the first six months of 2013 from 81 percent a year ago.

CAP REIT’s vacancy rates over the last three years have consistently been at or near economically full levels and have significantly outperformed those of its peers. As of June 30, 2013, occupancy was 98.4 percent.

Average monthly rents were up 2.8 percent, with increase across all segments of the REIT’s residential portfolio, despite the lower rent guidelines and increases in Ontario and British Columbia.

Based on strong fundamentals across all of its geographic markets, management expects this track record of high occupancy to continue and to drive increases in average monthly rents going forward.

Canadian Apartment Properties REIT, currently yielding 5.6 percent, is a buy under USD25.

Dundee REIT (TSX: D-U, OTC: DRETF) reported a 14.1 percent increase in FFO to CAD76 million, though FFO per unit were flat at CAD0.72. Net operating income was up 1.2 percent on higher rental rates on new leasing completed over the past year and the benefit of step-up rent increases.

Dundee completed more than 690,000 square feet of new leasing during the second quarter, with 258,000 square feet of vacancy committed for future occupancy, all at incrementally higher rental rates.

Average in-place net rents are approximately 11 percent below estimated market rents, providing ample room for more organic growth going forward.

Debt as a percentage of gross book value is now down to 46.4 percent from 51.2 percent a year ago.

Occupancy, meanwhile, remained solid at 94.9 percent, well ahead of the national average.

Dundee completed CAD360.1 million of acquisitions during the quarter, 1 million square feet of well-leased office buildings in key Canadian markets, including Vancouver, Calgary, Saskatoon and Toronto. Management has strengthened the quality and stability of the portfolio. There’s also CAD140.3 million of pending acquisitions under contract.

Dundee REIT, now yielding 7.7 percent, is a buy under USD39 for investors who don’t already have a position.

RioCan REIT (TSX: REI-U, OTC: RIOCF), whose second-quarter earnings we broke down in the August 2013 Portfolio Update, like Northern Property is commencing a buyback of its own units in the aftermath of the REIT selloff.

RioCan is cleared by the TSX to buy up to 15 million units, or approximately 5 percent of units outstanding through Aug. 2, 2014.

The REIT reported that funds from operations (FFO) were up 14 percent to CAD121 million, 8 percent on a per-unit basis to CAD0.40. Overall occupancy was 96.7 percent at the end of the quarter, down from 97.4 percent a year ago. The decline in occupancy was largely due to five Zellers stores totaling 466,000 square feet that were returned to RioCan on April 1, 2013.

RioCan renewed 956,000 square feet in its Canadian portfolio during the second quarter at an average rent increase of CAD2.14 per square foot, representing an increase of 12 percent compared to 13.4 percent for the same period in 2012.

Management expects “continued improvement” in cash flow into 2014 due to the completion of projects under development as well organic growth through higher rents.

RioCan, a great value at these levels, is a buy under USD27.

Bird’s Plight

Conservative Holding Bird Construction Inc (TSX: BDT, OTC: BIRDF) was grounded in the immediate aftermath of its Aug. 13 second-quarter earnings report, the shares falling from CAD12.95 in the days ahead of the announcement to as low as CAD11.20 by Aug. 29.

As of this writing Bird shares are back above CAD12 on the TSX.

CEO Tim Talbott noted in the company’s earnings release that “2013 operating results were negatively impacted by the recognition of a loss on one fixed-price construction project which has experienced a number of execution issues.”

Because of this contract Bird reported second-quarter net income of CAD300,000 on construction revenue of CAD312.3 million compared to net income of CAD9 million on revenue of CAD343.1 million during the second quarter of 2012.

Excluding the impact of this single contract, results would have been in line with “expectations considering the current market conditions.”

According to management the problem project is 85 percent complete and will be done by the end of the fourth quarter. Aside from execution issues, the project was also negatively impacted by work stoppages that occurred during labor contract negotiations that stretched out the schedule and increased costs.

The second-quarter CAD8.4 million charge covers Bird’s expected loss through year-end; management expects no further negative impact on earnings.

Management is “optimistic” that improving market conditions will lead to better results during the second half of 2013. At the same time, a solid backlog should drive improved performance in 2014.

Bird’s backlog as of June 30, 2013, was CAD1.064 billion, down 0.8 percent from CAD1.073 billion as of Dec. 31, 2012. The company affirmed its monthly dividend rate of CAD0.0633 per share for September, October and November.

This week Bird announced it had been awarded new contracts totaling approximately CAD175 million involving civil and building construction for industrial and institutional clients across Canada. The work is expected to commence this fall, with expected completion dates extending into 2015. The contracts will be added to the company’s third-quarter backlog.

That’s on top of contract awards in excess of CAD100 million announced in July 2013, establishing more evidence of Bird’s ability to win construction contracts in a competitive marketplace.

Declines in mining activity in Eastern Canada and construction from industrial clients operating in the energy-rich province of Alberta has also dragged on revenue, and expenses ticked higher due to a January acquisition.

But management expects activity in the oil sands to drive industrial growth, while the commercial market is picking up in various parts of Canada.

As of June 30 Bird had CAD115.5 million in cash on its balance sheet, more than sufficient to cover the CAD32.3 million in annual dividends. And management expects its cash position to rebound during the second half of the year.

Bird has just CAD42.8 million in long-term debt on its balance sheet, down CAD5.3 million from Dec. 31, 2012.

The 7.7 percent rebound in Bird’s share price over the past week is recognition of Bird’s leadership in major-project development and construction following its successful merger with HJ O’Connell in mid-2011. The CAD77.5 million deal added heavy construction, civil construction and contract surface mining expertise primarily in eastern Canada to Bird’s legacy operations in the west.

Bird is a diversified company serving mining, energy, industrial and infrastructure construction with an unmatched base of both public- and private-sector clients. The long-term health of its underlying business has not been harmed by the one-off item that marred its second-quarter financial numbers. Bird Construction, which is yielding 6.3 percent, is a buy under USD14.50.

If You Grow It

In addition to Northern Property REIT, three other Portfolio Holdings that announced earnings since the August 2013 issue also announced payout increases.

Note that second-quarter earnings for EnerCare Inc (TSX: ECI, OTC: CSUWF), which raised its dividend by 1.8 percent, are addressed in this month’s Best Buys feature.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS), which we added to the CE Portfolio Conservative Holdings in the August 2013 issue, announced its presence with good authority, raising its quarterly dividend by 3.3 percent to CAD0.62, or CAD2.48 on an annualized basis.

Scotiabank reported fiscal 2013 third-quarter adjusted net income of CAD1.77 billion, or CAD1.37 per share, compared to CAD2.05 billion, or CAD1.69 per share a year ago.

Fiscal 2013 third-quarter results include CAD0.07 per share related to a one-off item in its international unit, while the year-ago quarter benefitted from a CAD0.53 per share gain on the sale of the Scotia Plaza office complex in Toronto. Excluding items, earnings per share were CAD1.30, an increase of 12 percent.

Provisions for credit losses were down to CAD314 million from CAD402 million a year earlier.

Three out of Scotiabank’s four business lines had double-digit revenue growth, with its Canadian business doing “exceptionally well.”

Domestic Banking earnings were up 11 percent on broad-based revenue growth, with the bottom line driven by the acquisition of ING DIRECT, growth in auto loans and mortgages. Deposit growth was also solid.

International Banking results were also driven by strong growth in Personal and Commercial Banking, particularly in Latin America, on acquisitions and contributions from foreign partners. The international unit reported commercial and retail loan growth of 12 percent and 9 percent, respectively.

Resorts for Global Wealth Management were also “exceptional,” benefiting from improved equity markets and higher assets under management and assets under administration. The insurance business saw good sales growth.

As of July 31, 2013, Scotiabank’s Basel III common equity tier 1 ratio was 8.9 percent, an improvement of 30 basis points quarter over quarter.

Bank of Nova Scotia, which has raised its dividend five times since the end of the Great Recession, is a buy under USD60.

Pembina Pipeline Corp (TSX: PPL, NYSE: PBA) boosted its monthly dividend rate by 3.7 percent to CAD0.14, effective with the payment due Sept. 13, 2013, to shareholders of record as of Aug. 25.

Management reported adjusted cash flow from operating activities of CAD144 million, or CAD0.47 per share, for the second quarter, up from CAD89.5 million, or CAD0.31 per share, a year ago.

The payout ratio based on adjusted operating cash flow per share was 86.2 percent.

Revenue, net of cost of goods sold, increased 29 percent to CAD294.8 million during the second quarter from CAD229 million on strong performances by each of Pembina’s businesses.

During the first half of 2013 Pembina secured approximately CAD1.5 billion in capital projects that will drive cash flow and dividend growth.

This figure doesn’t include the recently executed Engineering Support Agreement (ESA) with KKD Oil Sands Partnership (KOSP) covering the Cornerstone Oil Sands Pipeline project in Alberta.

Pembina has approximately nearly 1 million barrels per day of fully contracted oil sands crude oil transportation capacity. Its oil sands assets operate under long-term, extendible contracts that provide for the flow through of operating costs to shippers. Operating income generated by these assets is related to invested capital and isn’t sensitive to fluctuations in costs or capacity utilization.

Pembina Pipeline is a strong buy under USD32, up from USD30 based on the 3.7 percent dividend increase.

Conservative Roundup

Brookfield Renewable Energy Partners LP (TSX: BEP-U, NYSE: BEP) reported second-quarter adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) of CAD357 million, up from CAD221 million as new assets acquired since June 30, 2012, contributed CAD45 million.

Funds from operations for the quarter were CAD187 million, or CAD0.71 per unit, were in line with internal company forecasts and up from CAD87 million, or CAD0.33 per unit, a year ago.

The payout ratio for the quarter based on funds from operations was 51.1 percent.

Total generation was 6,265 gigawatt hours (GWh) compared to the long-term average of 6,171 GWh and to 4,101 GWh a year ago. Hydroelectric generation was 1,948 GWh higher than the prior year, reflecting the solid performance of new assets that contributed 994 GWh to generation.

Brookfield Renewable Energy Partners remains a buy under USD32.

Cineplex Inc (TSX: CGX, OTC: CPXGF) reported second-quarter revenue growth of 14.4 percent to CAD301.6 million, as attendance grew by 8.6 percent on solid offerings from Hollywood.

Other revenue–including concessions–was up 36.6 percent, demonstrating the effectiveness of management’s diversification strategy. Media growth continues to be strong, rising 44.7 percent.

Management expressed confidence that growth trends would persist into the second half of the year.

Cineplex continues to expand its core business–witness the June 2013 acquisition of 26 theaters from Empire Company Ltd (TSX: EMP/A, OTC: EMLAF)–but is also creating new ways to generate cash flow from sources beyond the typical cinema model, including events such as live simulcasts from the Metropolitan Opera, on-screen advertising, on-site gaming and a robust Internet presence.

All these efforts will support cash flow growth even if there’s a hiccup in the Hollywood hit parade. Cineplex is a buy on dips to USD32.25.

Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF) reported a 14 percent increase in second-quarter power production, which drove 16 percent growth in operating revenue to CAD63.2 million.

Adjusted earnings before interest, taxation, depreciation and amortization were up 15 percent to CAD51.3 million on the addition of new capacity.

Management noted that three more projects under construction are on track to reach commercial operation before the end of 2013, while another five projects are under permit phase. Innergex recently also closed three project financings and extended its revolving term credit facility for greater financing flexibility.

That’s in addition to completing the previously announced acquisition of the Magpie hydroelectric facility in late July. Innergex, an invest-to-grow story that’s suffered a difficult 12 months, remains a buy under USD10.

Note that Student Transportation Inc (TSX: STB, NSDQ: STB) will report fiscal 2013 fourth-quarter and full-year results on Sept. 11, 2013. We’ll have a review of financial and operating numbers in the October issue.

Aggressive Roundup

Extendicare Inc (TSX: EXE, OTC: EXETF) reported second-quarter results that reflect the current climate of uncertainty in the US healthcare sector as well as still less than robust economic conditions.

But Extendicare is taking steps to respond to these challenges–including the separation of its US and Canadian businesses.

Consolidated revenue declined 5.8 percent, but on a same-facility basis, excluding the impact of Extendicare’s exit from Kentucky, revenue was essentially flat at CAD498.6 million. Adjusted EBITDA declined by 5.7 percent compared to the second quarter of 2012 but were up 5.1 percent sequentially, while margins remained unchanged at 8.3 percent.

Adjusted FFO grew by 13.3 percent year over year and 21.4 percent sequentially to CAD22.1 million.

Financial results in Canada were solid, as occupancy remains strong.

In Canada average daily revenue rates increased by 2.6 percent on a year-over-year basis, and occupancy rates remain unchanged at a solid 98 percent. Revenue improved by CAD5.1 million to CAD186.7 million, and adjusted EBITDA was up slightly over last year. Adjusted FFO improved to CAD10.2 million from CAD9.1 million a year ago.

Second-quarter results benefitted from funding changes in Ontario and Alberta that became affective of April 1. In Ontario Extendicare received a 2 percent funding increase worth an estimated CAD3.6 million in annual but with no impact on earnings.

In Alberta funding is up 2.1 percent as of April 1, representing CAD1.6 million of additional revenue.

Canadian homecare volumes in the second quarter were up year over year by 4.4 percent and sequentially by 3.5 percent.

In the US, average daily Medicare Part A and Managed Care rates increased year over year. On a sequential basis, rates were hurt by the sequestration funding reduction of 2 percent that became effective April 1, 2013. US census levels were down year over year and sequentially.

Average same-facility occupancy was 82.6 percent, below the 84.8 percent of a year ago and the 84.6 percent for the first quarter of 2013.

Extendicare, still evaluating steps that will result in the separation of its US and Canadian businesses, is a buy under USD7 for aggressive investors.

Ag Growth International Inc (TSX: AFN, OTC: AGGZF), a Best Buy selection in the August 2013 issue, reported a 5.1 percent decrease in trade sales to CAD93.9 million. That’s a consequence of the lingering impact of the 2012 US drought.

The company backlog has grown substantially on favorable crop conditions in the US and an increase in international orders. That bodes well for a solid second half and a good year in 2014. Ag Growth is a buy under USD40.

Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) reported a 12.5 percent decline in distributable cash flow to CAD21.4 million, or CAD0.51 per share. Revenue was off by 4.4 percent to CAD217.5 million due to a decline in international sales.

Adjusted cash flows from operating activities for the period were CAD30.3 million, flat with year-ago totals. Earnings before interest, taxation, depreciation and amortization for the second quarter were CAD36.0 million, down from CAD36.8 million a year ago.

Net earnings were CAD10 million, up from CAD8.5 million primarily due to an income tax recovery in the second quarter of 2013 compared with an income tax expense for the same period of 2012, partially offset by higher levels of depreciation and amortization in the second quarter of 2013 relative to the second quarter of 2012.

Management noted that North American sales volumes for most of its products in 2013 have been higher than 2012. Chemtrade is particularly encouraged by demand in North America for its largest product by volume, sulfuric acid, considered the most widely used chemical in the world and often regarded as a good indicator of economic activity.

Chemtrade is a buy under USD16.

Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) reported a 31 percent increase in second-quarter FFO to CAD504.4 million, or CAD1.31 per share.

Production was up 21 percent sequentially to 117,799 barrels of oil equivalent per day, while realized crude prices were up 8 percent and natural gas prices were up 91 percent.

Management boosted full-year production and cash flow guidance. Crescent Point Energy is a strong buy all the way up to USD48.

Enerplus Corp (TSX: ERF, NYSE: ERF) reported a 39.7 percent increase in second-quarter FFO to CAD204.7 million, or CAD1.02 per share.

Production was up 9.6 percent to 90,037 barrels of oil equivalent per day, and realized oil and natural gas prices were higher.

Management expects to “meet or beat” 2013 production, cash flow guidance. Enerplus is a strong buy on dips to USD14.

Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF) reported a 41 percent surge in second-quarter production to 58,145 barrels of oil equivalent per day. Combined with higher natural gas prices, that drove FFO up 70 percent to CAD110 million.

This lowest of low-cost producers did report an uptick in production-related expense all the way to CAD2.10 per barrel of oil equivalent due to higher power prices. That’s still exponentially lower than any of its peers. Peyto Exploration & Development remains a prudent way to play natural gas up to USD33.

Wajax Corp’s (TSX: WJX, OTC: WJXFF) second-quarter revenue was down 6 percent to CAD362.1 million, as sales for equipment and power systems declined, offset by slight uptick for industrial components.