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REIT fund finds shelter in apartments, retail

What are we looking for?

What the pros are buying.

You can get investment ideas by checking out a fund manager's top holdings. Given the preoccupation with income and higher-yielding securities in a low interest rate environment, let's look at  Criterion REIT Income Fund at

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More about the fund

The $3-million real estate equity mutual fund has been managed by Lee Goldman and Chris Couprie of First Asset Investment Management Inc. since mid-2010. The pair have also been running closed-end funds focused on real estate investments trusts since 2006.

Criterion REIT Income gained 19 per cent for the year ended Oct. 31 versus 2.3 per cent for the S&P/TSX Capped Real Estate Index. The managers focus mainly on Canadian REITs, and look for securities trading at a discount to net asset value (NAV).

The fund could build up cash to be defensive, but "it pays to be invested" right now because of the attractive yields on REITs, said Mr. Goldman, the lead manager. The fund focuses mainly on Canadian REITs or companies in the retail, office and apartment sectors, and is steering away from the more economically sensitive hotel REITs, said Mr. Goldman, the lead manager.

What did we find?

InterRent, a small-capitalization apartment REIT, is a turnaround play that has risen more than a 100 per cent this year. Its 4-per-cent yield is among the lowest of the top 10 holdings.

But InterRent, which owns apartment buildings mainly in Ontario, has more upside potential and could increase distributions next year as cash flow increases, Mr. Goldman suggested. Under new management two years ago, the occupancy rate has risen sharply, while margins are also improving. This REIT trades below the managers' estimated NAV of $3.50 a share, which is also their current "conservative" one-year target price.

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Mr. Goldman also likes Killam Properties Inc.,  which rents apartment buildings and lots for mobile homes mainly in Atlantic Canada. "It's a very, very stable business," he said. "Occupancy is generally about 99 per cent. They have got about 20,000 units [including lots]"

A potential catalyst for this stock is a $25-billion federal contract granted recently to Halifax's Irving Shipbuilding Inc., which should create thousands of jobs and help boost rents in the area because of the increased demand for lodging, he said. His one-year target for the stock is $12 a share.

Canadian Real Estate Investment Trust, which is "one of the most stable REITs in the Canadian landscape" and has a low payout ratio of 66 per cent, is also attractive, he said. This REIT is 58-per-cent focused on retail, with another 21 per cent each weighted to the office and industrial sectors. Despite economic headwinds, demand for retail has been strong because of a lack of new developments in recent years and rising demand from U.S. retailers coming to Canada, he said. His one-year target is $37 a unit.

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