The rout among real estate investment trusts (REIT) that we wrote about at the beginning of June was followed by a modest rebound, but has since renewed its descent. However, it’s important to note that this selloff doesn’t appear to be driven by any significant news at individual REITs themselves.

Instead, the decline was initially triggered in late May, following US Federal Reserve Chairman Ben Bernanke’s remarks before Congress’ Joint Economic Committee. In his testimony, Bernanke provided the first clear sign that the Fed was considering how to start winding down its extraordinary stimulus. The Fed chief said that he believed the US economy was improving at a pace that would allow the central bank to begin tapering its $85 billion per month bond-purchasing program, otherwise known as quantitative easing (QE), as early as September.

Although Bernanke noted that any changes to Fed policy would be entirely conditional on economic data, the market nevertheless treated a September taper as a foregone conclusion, with traders indiscriminately dumping a wide array of dividend-paying securities that had been favored by retail investors starved for income amid a historically low interest rate environment.

Traders were anticipating the fact that as bond rates rise, income investors will naturally eschew riskier dividend stocks in favor of traditionally steadier fixed-income securities. Of course, the risk here is relative: Dividend stocks are riskier than bonds, but far less risky than the broad equity market.

Because dividend stocks faced limited competition from bonds over the past several years and have, therefore, been pushed to premium valuations, in many cases, they were certainly due for a correction. Indeed, both US and Canadian REITs have vastly outperformed the stock markets in the US and Canada since the bottom of the bear market in March 2009.

Over that period, the Bloomberg Canadian REIT Index gained 35.8 percent annualized, including the reinvestment of distributions, while the Morningstar US REIT Index gained 29.7 percent annually on a dividend-reinvested basis. By contrast, the S&P 500 returned 25.6 percent annually, while the S&P/TSX Composite Index climbed 22.1 percent annually.

Since its peak on April 30, the Bloomberg Canadian REIT Index has dropped 18.5 percent on a price basis, while the Morningstar US REIT Index has dropped 11.1 percent. Of course, for a slightly fairer comparison, it’s important to note that the Morningstar index peaked on May 21, and is now down about 13.2 percent from that high.

So the pain has not been limited to Canadian REITs alone, though they’ve certainly suffered a greater slump than their peers in the US. Part of the explanation for this discrepancy is that the broader Canadian market itself has fallen, down 2.3 percent on a price basis since April 30, while US REITs have been somewhat buoyed by a US stock market that’s up 6.2 percent over that same period.

Another part of the explanation is the weakening Canadian dollar. The looney has spent much of 2013 trading below parity with the US dollar, and the Bloomberg Canadian REIT Index’s performance has some modest correlation with the currency. The Canadian dollar has dropped 5.6 percent relative to the US dollar since its year-to-date peak in early January. And its 3.3 percent decline since April 30 has contributed to the gulf in performance between Canadian REITs and their counterparts in the US since that date.

Now the market is trying to predict how quickly the Fed will adjust its policy based on economic data. In a June press conference, Bernanke attempted to offer greater clarity by noting that he expected the unemployment rate to be around 7 percent when the Fed commences its taper.

But he’s also made comments that the headline unemployment rate likely masks some of the real weakness in the job market. That’s certainly evidenced by the fact that part-time employment in low-wage industries has accounted for a majority of new jobs created so far this year–76.7 percent of the 953,000 new jobs. These data hardly suggest a resurgent economy, and the Fed will presumably take a deeper dive into the data before coming to any conclusions.

So the Fed’s taper could very well occur at a later juncture than September. And as Bernanke has pointed out, the Fed’s action on this front could be halting, or even revert to full easing if the economic data trend downward again.

And short-term rates, which the Fed influences via the federal funds rate, are unlikely to rise for at least another year or two, as Bernanke has previously cited an unemployment rate of 6.5 percent as the necessary prerequisite to begin considering a rate hike.

Of course, even if the Fed defers its actions to a later date than the market currently anticipates, in the short-to-medium term, anxious traders can still create a situation as if rising rates are already coming to pass. A quick rundown of the bond markets shows the dramatic movement since Bernanke first acknowledged he’s looking for a way to quit QE.

Canadian 10-year government bonds currently yield 2.50 percent, up 83 basis points, or 49.7 percent, since the yield hit a low on May 2. Similarly, Canadian 30-year government bonds currently yield 3 percent, up 71 basis points, or 31.1 percent, since the yield hit a one-year low in mid-November.

The yield on the 10-Year US Treasury note has jumped 97 basis points, or 60 percent, since its year-to-date low in early May. They currently trade near 2.6 percent. And US 30-year government bond yields have climbed 86 basis points, or 30.6 percent, since their year-to-date low in early May. They currently trade near 3.68 percent.

The question is what will happen to the bond market if the Fed’s fall taper fails to materialize? Will they correct sharply or simply tread water?

In the short term, of course, all this Fed handicapping is mere guesswork. Naturally, the economy will eventually improve on its own timetable, and historically low rates will rise to more normal levels.

The good news is that, contrary to the conventional wisdom, dividend stocks in general, along with REITs in particular, have actually performed well in past rising-rate environments.

In the last such environment, which ran from June 2004 through mid-September 2007, the Bloomberg Canadian REIT Index gained 21.9 percent annually on a price basis, and 30 percent annually when including the reinvestment of dividends. Over that same period, the S&P/TSX Composite Index gained 26 percent annually on a price basis, and 28.6 percent annually including dividends.

Meanwhile, US REITs gained 11.1 percent annually, and 16.5 percent annually including dividends. Over that same period, the S&P 500 gained 9 percent annually, and 16.5 percent annually including dividends.

Of course, these performances occurred during a historic bubble in real estate. But a review of historical data shows that such performances are not unprecedented during a rising-rate environment. For instance, during the nearly five-year period from December 1976 to October 1981, 10-year Treasury yields leaped from 6.87 percent to 15.15 percent, but the value of the FTSE NAREIT All Equity REITs Index gained 8.7 percent annually on a price basis and an impressive 20.4 percent annually on a dividend-reinvested basis during that period.

Finally, rising rates would presumably signal an improving economy. So even if REITs can’t expand their portfolios as cheaply as in the past, they’ll benefit from the greater organic growth derived from rising rents.

Still, it’s important to be highly selective in this uncertain environment, and that’s why we favor REITs that focus on defensive areas of the real estate market and have exposure to regions with strong growth.

The Roundup

RioCan REIT (TSX: REI-U, OTC: RIOCF) is down 18.4 percent since hitting a year-to-date high of CAD29.51 on April 30. Its selloff began in earnest in late May, following which there was a brief rebound through mid-July and renewed selling thereafter.

RioCan is the largest Canadian retail REIT and owns a portfolio of 53.4 million net leasable square feet of real estate in the US and Canada. Occupancy across its portfolio of 348 properties stood at 96.7 percent at quarter end.

The REIT prides itself on its exposure to Canada’s six fastest-growing urban markets, with Ontario accounting for 56.7 percent of annualized rental revenue, and the six urban markets overall contributing 72 percent of revenue. RioCan’s growing presence in the Northeastern US and Texas now accounts for 14.1 percent of annualized rental revenue. The REIT’s top 10 tenants account for 25.3 percent of rental revenue, with a weighted average remaining lease of 8.7 years.

Much of RioCan’s CAD17 million rise in net operating income during the quarter was derived from acquisitions, with Canadian same store and same property growth accounting for just 0.6 percent and 0.4 percent of that increase, respectively. In the US, same store and same property growth was slightly stronger at 1.4 percent overall.

So while an environment of rising interest rates would raise its cost of acquiring more properties, the improving economy that would precipitate higher rates would presumably flow through to RioCan’s rents and, therefore, boost organic growth.

In fact, RioCan leased 372,000 square feet during the quarter at an average net rent of CAD18.72, a 25.8 percent increase from a year ago. The biggest gains in average rent were in office properties, up 77.3 percent, and non-grocery anchored shopping centers, up 98.9 percent.

Beyond that, management has already shifted its strategy in anticipation that rates will eventually rise by becoming more selective in its acquisitions and redeveloping existing properties to generate higher returns, while pruning the portfolio of underperformers. During the second quarter, it acquired over CAD460 million in seven income-producing properties, but also made CAD364 million in dispositions.

RioCan generated CAD0.35 in funds from operations (FFO) per unit during the second quarter, a 9.4 percent improvement from the prior year’s quarter. FFO is a non-GAAP metric that is considered the relevant measure of profits for REITs.

Over the past five years, growth in FFO per unit has been inconsistent, with years such as 2010, which offered 15 percent year-over-year growth followed by a 7.3 percent decline the following year. In 2012, FFO per unit grew 14.8 percent, while it’s up 15 percent over the past four quarters overall.

Since REITs use a combination of debt and secondary issuances to finance the expansion of their property portfolios, it’s important for FFO per unit to grow as the unit count rises. For instance, RioCan’s total common units outstanding grew to 302 million by the end of the second quarter, up 36 percent since 2008. Meanwhile, the CAD1.60 in operating FFO per unit over the trailing 12 months is 8 percent higher than it was in 2008. And thanks to the selloff, on a price to trailing 12-month FFO basis, RioCan’s units are trading back at 2010 levels.

Equally important, RioCan’s quarterly payout was fully covered by both FFO and operating FFO. The latter of which is FFO without the effect of non-cash gains or losses and is intended as a truer measure of quarterly operations. FFO covered the distribution on a 1-to-1 basis, while distributions accounted for 87.6 percent of operating FFO.

The past several years have afforded REITs tremendous opportunities to improve their capital structures, and RioCan has benefitted in a number of areas. To be sure, historically low interest rates have certainly spurred borrowing, but income-hungry investors have supported the market for secondary issuances.

Even though its total debt stood at CAD5.9 billion at quarter end, more than double the amount in 2009, the growth in value of its assets has slightly outpaced its borrowing, with total assets at CAD13.2 billion at quarter end versus CAD5.9 billion in 2009. Total debt has fallen from 62.5 percent of total assets in 2009 to 44.2 percent at quarter end.

RioCan has also made shrewd use of low interest rates by refinancing more expensive debt with cheaper borrowings. The REIT’s total debt has a 4.4 percent weighted average contractual interest rate for the period through the end of 2017. At the end of the second quarter in 2009, by comparison, the weighted average interest rate for a period of similar duration was 5.96 percent.

RioCan pays a monthly distribution of 0.1175, for a current yield of 5.9 percent. In January, the REIT upped its payout by 2.2 percent, the first increase since 2008. RioCan remains a buy up to USD27 in the Conservative Portfolio.

Here’s a roundup of the damage the other REITs in our Portfolios have suffered, as well as their scheduled reporting dates. Again, based on precedent, this could very well be a buying opportunity. At the very least, their payouts are compensating investors for enduring this current period of downward volatility:

Artis REIT (TSX: AX-U, OTC: ARESF) is down 15.7 percent on a price basis, since hitting a year-to-date high of CAD17.03 on April 30, and its units currently trade just 0.6 percent above their 52-week low. The selloff began in earnest in late May, and then reasserted itself toward the end of July.

Artis REIT has a monthly distribution of CAD0.09, for a current yield of 7.5 percent.

The REIT is scheduled to report its earnings on Aug. 8, after the market’s close.

Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF) is down 18.9 percent on a price basis, since hitting a year-to-date high of CAD26.04 on April 30, and its units currently trade just 1.7 percent above their 52-week low. The selloff began in earnest in late May, and then reasserted itself in mid-July.

Canadian Apartment Properties pays a monthly distribution of CAD0.096, for a current yield of 5.5 percent.

The REIT is scheduled to report its earnings today, after the market’s close.

Dundee REIT (TSX: D-U, OTC: DRETF) is down 22.1 percent on a price basis, since hitting a year-to-date high of CAD38.93 in late January, and its units currently trade just 1.4 percent above their 52-week low. Its units have been on a long downward slide this year, with the selloff intensifying in late May and again in late July.

Dundee pays a monthly distribution of CAD0.18666, for a current yield of 7.4 percent.

The REIT is scheduled to report its earnings on Aug. 8, after the market’s close.

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) is down 20.8 percent on a price basis, since hitting a year-to-date high of CAD32.73 in mid-April, and its units currently trade just 0.3 percent above their 52-week low. Its selloff began in earnest in early May, with a modest rebound in mid-July, followed by a renewed descent in late July.

Northern Property pays a monthly distribution of CAD0.1275, for a current yield of 5.9 percent.

The REIT is scheduled to report its earnings on Aug. 13.

Here’s where to find our analyses for Portfolio Holdings that have reported earnings for the second quarter of 2013:

Conservative Holdings

• AltaGas Ltd (TSX: ALA, OTC: ATGFF)–August Portfolio Update
• Artis REIT (TSX: AX-U, OTC: ARESF)–Aug. 8 (confirmed)
• Bird Construction Inc (TSX: BDT, OTC: BIRDF)–Aug. 22 (estimate)
• Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–August Portfolio Update
• Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–Aug. 8 (confirmed)
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–Aug. 7 (confirmed)
• Cineplex Inc (TSX: CGX, OTC: CPXGF)–Aug. 8 (confirmed)
• Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–August Portfolio Update
• Dundee REIT (TSX: D-U, OTC: DRETF)–Aug. 8 (confirmed)
• EnerCare Inc (TSX: ECI, OTC: CSUWF)–Aug. 13 (confirmed)
• Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–Aug. 8 (confirmed)
• Keyera Corp (TSX: KEY, OTC: KEYUF)–August Portfolio Update
• Northern Property REIT (TSX: NPR, OTC: NPRUF)–Aug. 13 (confirmed)
• Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–Aug. 9 (confirmed)
• RioCan REIT (TSX: REI, OTC: RIOCF)–August Portfolio Update
• Shaw Communications Inc (TSX: SJR/A, NYSE: SJR)–July Portfolio Update
• Student Transportation Inc (TSX: STB, NSDQ: STB)–Sept. 25 (estimate)
• TransForce Inc (TSX: TFI, OTC: TFIFF)–August Portfolio Update

Aggressive Holdings

• Acadian Timber Corp (TSX: ADN OTC: ACAZF)–August Portfolio Update
• Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–Aug. 14 (confirmed)
• ARC Resources Ltd (TSX: ARX, OTC: AETUF)–August “In Focus”
• Atlantic Power Corp (TSX: ATP, NYSE: AT)–August Portfolio Update
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Aug. 8 (confirmed)
• Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–Aug. 8 (confirmed)
• Enerplus Corp (TSX: ERF, NYSE: ERF)–Aug. 9 (confirmed)
• Extendicare Inc (TSX: EXE, OTC: EXETF)–Aug. 8 (confirmed)
• Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF)–August “In Focus”
• Newalta Corp (TSX: NAL, OTC: NWLTF)–August Portfolio Update
• Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–August Portfolio Update
• Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–August Portfolio Update
• Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–Aug. 22 (estimate)
• Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–August “In Focus”
• Wajax Corp (TSX: WJX, OTC: WJXFF)–Aug. 9 (confirmed)