Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. michael@wickhaminvestments.com
What are we looking for?
The Bloomberg Canadian REIT index returned about 75 per cent to investors over the past three years, and 17 per cent in 2012. Are we in for another banner year for real estate investment trusts?
Interestingly, last month Loblaw Cos. announced it will create a REIT out of its property holdings, and Hudson’s Bay Co. said it would consider a similar plan. My colleague Sean Pugliese and I thought we would take a fresh look at the sector.
The screen
We ranked 22 REITs by market capitalization; only those with market caps above $200-million were included. We then looked at the distribution yield.
In analyzing REITs, investors need to ignore accounting earnings and go directly to the adjusted funds from operations (AFFO). This key metric is simply funds from operations minus all items that don’t really add value to the property. The price-to-AFFO is a valuation metric – the share price divided by the consensus estimate of AFFO. We are looking for a low number.
The payout ratio is based on analysts’ estimates for distributions, and the AFFO for 2013. Again, a low number is desirable.
The debt-to-equity ratio indicates the proportion of shareholders’ equity and debt used to finance the company’s assets. A high debt-to-equity figure indicates a company may not be able to generate enough cash to satisfy its debt obligations.
What did we find?
The highest yielding REITs are Retrocom Mid-Market and Partners, but they also have the highest payout ratios, both over 100 per cent. This is not a sustainable strategy. In addition, they both score very well in the value category with the lowest price-to-AFFOs. The lowest payout ratios are InterRent and Canadian.
If investors are looking for the best overall combination of size, yield, value and possible safety of the distribution, Cominar, Artis and Dundee International might be worth a look.
While it may be doubtful to see another 17 per cent return for the sector in 2013, low interest rates, and the quest for yield, could continue to support current REIT valuations.
Canada's largest real estate investment trusts
| Company | Ticker | Market Cap ($-mil) | Price ($) |
|---|---|---|---|
| RioCan REIT | REI.UN-T | 8,116 | 27.3 |
| H&R REIT | HR.UN-T | 4,540 | 23.35 |
| Calloway REIT | CWT.UN-T | 3,787 | 29.71 |
| Dundee REIT | D.UN-T | 3,780 | 37.6 |
| Boardwalk REIT | BEI.UN -T | 3,403 | 65.02 |
| Canadian REIT | REF.UN -T | 2,996 | 43.96 |
| Brookfield Cda Office | BOX.UN -T | 2,874 | 29.03 |
| Cominar REIT | CUF.UN-T | 2,773 | 22.35 |
| Primaris Retail REIT | PMZ.UN-T | 2,615 | 26.7 |
| Cdn. Apart. Prop. | CAR.UN -T | 2,592 | 25.75 |
*AFFO=adjusted funds from operations. Source: Bloomberg, Wickham Investment Counsel Inc.
| Company | Ticker | Market Cap ($-mil) | Price ($) | Dist. Yld (%) | P/AFFO* | Payout Ratio (%) | Debt/Equity |
|---|---|---|---|---|---|---|---|
| RioCan REIT | REI.UN-T | 8,116 | 27.3 | 5.17 | 19.52 | 97.59 | 0.82 |
| H&R REIT | HR.UN-T | 4,540 | 23.35 | 5.78 | 17.24 | 90.04 | 2.28 |
| Calloway REIT | CWT.UN-T | 3,787 | 29.71 | 5.21 | 19.12 | 89.83 | 1.03 |
| Dundee REIT | D.UN-T | 3,780 | 37.6 | 5.84 | 16.92 | 92.07 | 0.79 |
| Boardwalk REIT | BEI.UN -T | 3,403 | 65.02 | 2.95 | 33.16 | 71.31 | 0.74 |
| Canadian REIT | REF.UN -T | 2,996 | 43.96 | 3.39 | 28.86 | 63.09 | 1.05 |
| Brookfield Cda Office | BOX.UN -T | 2,874 | 29.03 | 4.03 | 24.53 | 92.89 | 0.69 |
| Cominar REIT | CUF.UN-T | 2,773 | 22.35 | 6.44 | 15.36 | 93.04 | 1.13 |
| Primaris Retail REIT | PMZ.UN-T | 2,615 | 26.7 | 4.76 | 21.37 | 93.87 | 0.69 |
| Cdn. Apart. Prop. | CAR.UN -T | 2,592 | 25.75 | 4.35 | 22.92 | 85.11 | 1.13 |
| Allied Prop. REIT | AP.UN-T | 2,174 | 33.97 | 4 | 25.01 | 82.91 | 0.76 |
| Chartwell Retirement | CSH.UN -T | 1,868 | 10.88 | 4.96 | 20.09 | 76.15 | 3.43 |
| Artis REIT | AX.UN-T | 1,805 | 15.73 | 6.87 | 14.56 | 91.66 | 1.14 |
| Morguard REIT | MRT.UN-T | 1,196 | 18.67 | 5.14 | 19.33 | 81.65 | 0.67 |
| Northern Property REIT | NPR.UN-T | 1,081 | 31.57 | 4.85 | 20.39 | 77.5 | 0.67 |
| Crombie REIT | CRR.UN-T | 790 | 14.81 | 6.01 | 16.64 | 98.56 | 1.62 |
| Dundee Int'l REIT | DI.UN-T | 757 | 11 | 7.27 | 13.75 | 96.39 | 1.33 |
| Northwest Healthcare Prop. | NWH.UN-T | 498 | 12.94 | 6.18 | 16.18 | 94.45 | 1.24 |
| Pure Industrial REIT | AAR.UN-T | 439 | 5.17 | 6.04 | 16.66 | 84.32 | 1.02 |
| Retrocom Mid-Market REIT | RMM.UN-T | 276 | 5.59 | 8.05 | 12.42 | 117.49 | 1.5 |
| InterRent REIT | IIP.UN-T | 246 | 5.52 | 2.89 | 33.51 | 54.18 | 0.98 |
| Partners REIT | PAR.UN-T | 208 | 8.09 | 7.91 | 12.64 | 105.96 | 1.86 |
Canada's largest real estate investment trusts
- REI.UN-T
- HR.UN-T
- CWT.UN-T
- D.UN-T
- BEI.UN-T
- REF.UN-T
- BOX.UN-T
- CUF.UN-T
- PMZ.UN-T
- CAR.UN-T
- AP.UN-T
- CSH.UN-T
- AX.UN-T
- MRT.UN-T
- NPR.UN-T
- CRR.UN-T
- DI.UN-T
- NWH.UN-T
- AAR.UN-T
- RMM.UN-T
- IIP.UN-T
- PAR.UN-T
