Michael Missaghie is portfolio manager at Sentry Investments. His focus is on REITs.
Top Picks:
Simon Property Group
Simon Property Group is the world's largest REIT and an owner, operator and developer of high quality shopping malls predominately in the United States with assets in Asia and Europe as well. Currently trades at a 10-per-cent discount to its net asset value, has strong access to attractively priced capital and offers forward free cash flow growth of close to 10 per cent. The current yield is at 2.9 per cent while the payout ratio sits at 70 per cent so we wouldn't be surprised to see further dividend increases in the future.
Allied Properties REIT
Allied is Canada's only REIT that owns, manages, and develops urban office (Class 'I') buildings. The REIT has done a great job diversifying outside of its key market of Toronto over the last two years and now has a solid concentration of assets out west in Edmonton, Calgary and Vancouver. Going forward we see embedded free cash flow growth through its current portfolio and intensification opportunities along with a best in class capital structure that will command a premium valuation.
Riocan REIT
Riocan is Canada's largest REIT and owns interests in retail centres across North America. The company has used the last 3 years to upgrade the quality of its portfolio into key urban markets and bring its distribution payout ratio to a sustainable level. It is currently trading at close to its net asset value but has historically traded at a premium. Going into a period of what will likely be more challenging capital markets for the REIT sector, Riocan should still be able to access attractively priced capital and take advantage of opportunities while delivering above average free cash flow growth.
Past Picks: April 4, 2013
Boardwalk REIT
Then: $62.97
Now: $58.53
Total return: -6.30 per cent
Artis REIT
Then: $15.99
Now: $15.00
Total return: -4.59 per cent
AvalonBay Communities Inc.
Then: $132.22
Now: $137.31
Total return: +4.67 per cent
Total return average: -2.07 per cent
Market outlook:
The broad equity markets will likely remain more volatile as investors digest talk of the U.S. federal reserve tapering back its bond purchases and a new range for the U.S. 10-year treasury. This adjustment period will likely be an opportunity for investors to purchase well capitalized REITs that are still poised to deliver above average free cash flow growth into 2013 and 2014. Property market fundamentals remain strong, distribution payout ratios continue to fall (a positive, meaning yields are safer and more stable) while the sector now trades at close to a 10-per-cent discount to net asset value.