BMO Capital lists REITs worth considering

Sustained low interest rates aren’t necessarily bad news for yield-seeking investors

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      There’s a widespread belief that there’s an inverse relationship between stock prices and interest rates. But Brian Belski, managing director and chief investment strategist of BMO Capital Markets, doesn’t always subscribe to this point of view.

      “I think it’s too simplistic to say stocks go up when interest rates go down and stocks go down when interest rates go up,” Belski told the Straight by phone.

      “Yield” refers to earnings generated on investments over a set period of time. And this can come in the form of a rise in the price of a stock or dividends received since it was purchased. Or it can be the interest paid on a bond.

      “I think your readers need to understand that when yields go down, bond prices go up,” Belski said. “And we’ve had this huge move out of equities and into fixed-income [securities]. It’s really been going on for the betterment of the last 20 years.”

      He noted that during the past 10 years, there’s been a positive correlation with respect to the performance of stocks and bonds. But when stock prices go up, that is traditionally accompanied by lower yields on bonds.

      The Bank of Canada’s overnight rate is at 0.25 percent. Last month, new Bank of Canada governor Tiff Macklem declared that interest rates will remain near historic lows for a long time.

      Then there are REITs, a.k.a. real-estate investment trusts, which pool the capital of many investors. This can generate a steady income stream. Shares in REITS can also be traded like stocks.

      “There are so many different parts of REITs,” Belski said. “There’s health-care REITs, there’s industrial REITs, there’s technology REITs.”

      One example of a tech REIT is American Tower Corp., which has 180,000 communication sites in its portfolio. This enables investors to cash in on the proliferation of cellphone use around the world. According to Belski, utilities are very similar to REITs from the perspective of dividends and yields.

      In a July 30 report looking at real estate and utilities in a low-yield environment, Belski and BMO Capital Markets investment strategist Ryan Bohren concluded that the “thirst for yield” will increase once the uncertainty over companies’ cash flows subside. They forecast that this will occur even though BMO Capital Markets expects that the U.S. Federal Reserve and the Bank of Canada will keep interest rates low until at least 2022.

      Belski and Bohren are more optimistic about real estate over utilities because the latter group tends to perform well in the earlier part of recessions when interest rates are rapidly declining. According to Belski, the economic recovery from the COVID-19 shock is already well underway, though he thinks it will be the slowest comeback from a recession on record.

      That’s because of how low interest rates are at the moment.

      “We still have another stimulus package coming from the United States government,” Belski said.

      At the back of the report, Belski and Bohren listed 16 Canadian-based REITs that they believe will outperform the market. Among them are Altus Group Limited, Canadian Apartment Properties Real Estate Investment Trust, Granite Real Estate Investment Trust, Killam Apartment Real Estate Investment Trust, and Colliers International Group.

      They emphasized that the relationship between real estate and interest rates “is more complicated compared with the more traditional high yield sectors given its less defensive and more economically sensitive operational composition”.

      At the same time, they see a “strong risk/reward opportunity for investors seeking yield” in certain REITs.