Real estate investment trusts (REITs) have been great investments, especially since the Great Recession. Can they continue their winning streak in light of rising interest rates in the U.S.? We think the answer is yes for virtually all the REITs in the CE Conservative Portfolio.

REITs are vulnerable to rising rates for two reasons: Their payouts become less attractive to investors, and their borrowing costs to finance new projects rise.

U.S. interest rates could rise this year, but not in a way that will hamper the operations of REITs. That’s because the increases are likely to be muted, given currently low inflation: U.S. wages are not increasing significantly and inflation is well below the Fed’s 2% target. This is despite impressive employment gains in the past year. U.S. unemployment recently fell to 5.5%, after an especially strong February, in which nearly 300,000 jobs were added to payrolls.

Currently, the Fed’s benchmark interest rate is near zero. An increase of 25 basis points would take the federal funds rate to 0.50%, which is still historically low.

Global Context

What’s more, if the U.S. does raise interest rates, it will be swimming against the global monetary tide. Since January 2015, many of the world’s major economies have substantially lowered interest rates in an effort to boost economic growth.

With its February rate cut, the Reserve Bank of Australia joined the Monetary Authority of Singapore, the Reserve Bank of New Zealand, the European Central Bank (ECB), the Bank of Canada, and the central banks of Denmark, Switzerland, India and China in announcing substantial policy shifts or easing monetary policy—in some cases dramatically.

In mid March, the ECB launched its own quantitative easing program and will be buying close to $70 billion a month in debt securities.

Even if the Fed does raise interest rates in June 2015, as many expect, the trajectory is far from certain. It will depend on incoming data. Unanticipated economic developments could slow, accelerate or even reverse the route of U.S. monetary policy.

Finally, strong global demand for U.S. government debt is likely to continue, keeping a lid on rate increases, especially on longer-term debt.

The Right REITs

Among the 19 CE Conservative Portfolio holdings, five are REITs. We are maintaining a more than 25% exposure to REITs because we think U.S. interest rate increases will be muted, and the relatively high yields on high-quality REITs will continue to attract investors who need and want consistent, reliable income.

Based on their operating results for 2014—both fourth-quarter and full-year—we believe the four REITs we rate as buys are all quality names that will continue to shine.

A Savvy Landlord

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) had a 12-month return of 26.5% (through March 3, 2015), making it a top performer on the Toronto Exchange.

Investors are willing to pay more for CAP because it’s doing something most other REITs are not: increasing its distribution. What’s more, those increases are coming from internally generated growth. In 2014, CAP’s average monthly rent rose 2.1%, with an occupancy rate just under 98%.

In May 2015, CAP increased its payout 2.6%, to CAD$1.18 annually. This was the 11th increase and the third in a row. Based on recent results, including the successful launch of operations in Ireland, another increase this May is highly probable.

For 2014, CAP reported that its funds from operations (FFO) rose 7.2%, to CAD$1.68 per unit, helped by an 11% increase in net operating income (NOI) to CAD$303.9 million. The net operating profit margin improved to 60% (from 53%), reflecting strong cost controls.

CAP REIT, a solid value with consistent growth, is a buy under USD25.

We favor CAP REIT over apartment-focused Northern Property REIT (TSX: NPR-U, OTC: NPRUF) because of the latter’s heavy exposure to the oil-and-gas-producing regions in Canada.

Northern Property remains a hold.

Wanted Properties

Artis REIT (TSX: AX-U, OTC: ARESF) is the most diversified of our REIT holdings. Its properties consist of offices (about half of income), retail (quarter of income) and industrial (another quarter). Operating across Canada and in two U.S. markets (Minneapolis and Phoenix), Artis has a wide variety of tenants, including the Canadian federal government, which brings in about 3% of its revenue.

No other single tenant represents more than 3.1% of total revenue. And most of its tenants are of high credit quality, with DBRS ratings in the BBB-to-AAA range.

Diversification, conservative finances and desirable properties led to a 1.7% increase in adjusted funds from operations in 2014—to CAD$1.23 per unit. Net operating income rose 7.7% to CAD$312.7 million, while the occupancy rate was a healthy 94.6%.

Artis REIT remains a buy under USD16.

Retail King

RioCan REIT (TSX: REI-U, OTC: RIOCF) is the biggest retail REIT in Canada, with nearly 50 million square feet (96% of its holdings) of retail space. This type of scale has clear cost benefits, though RioCan’s primary advantage comes from its growing presence in the U.S.

Most of RioCan’s revenue (86%) comes from national retail chains and anchor tenants.

RioCan’s operations in Canada’s six major markets—Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver—brought in 73% of 2014 revenue, with the rest coming from the U.S. In 2014, the occupancy rate was 97%, with rent increases on expired leases averaging 11% in Canada.

A strong balance sheet supports continued growth through property acquisitions and development on both sides of the Canada–U.S. border.

RioCan REIT is a buy under USD27.

Industrial Might

Canada’s industrial leasing market has remained generally healthy, with slightly lower supply, positive absorption and a higher net asking rental rate. Still, concern about an economic slowdown means industrial REITs, even the quality ones, are high yielders.

Demand for industrial space should remain strong, however, with moderate increases in rental rates as Canada’s manufacturing sector expands and retailers continue to invest in their distribution networks.

Currently, about 13 million square feet of industrial space is under construction in Canada, most of it in the Greater Toronto Area, driven by demand for retail distribution centers.

Numbers for Dream Industrial REIT (TSX: DIR-U, OTC: DREUF) reflect this.

Dream Industrial’s adjusted funds from operations increased 6.5% in 2014, to CAD$0.79 per unit, driven by a 14% increase in net operating income. And occupancy was 96% at the end of 2014.

Management should be able to realize solid rent growth, with estimated market rents exceeding current rental contracts by about 5%.

Dream Industrial REIT, whose 7.5% yield is the highest among our four REIT favorites, is a buy under USD11.