What are we looking for?
Canadian real estate investment trusts (REITs) with attractive total return potential.
The screen
The Canadian market has been a relative outperformer this year, buoyed primarily by a resurgence in energy and materials sectors. The real estate sector, specifically REITs, has also performed well – the S&P/TSX REIT index has posted a total return of 10.7 per cent for the first three months of 2016 and has surged over 18 per cent since the low seen on Jan. 18.
In order to identify potentially attractive REITs with reasonable valuations and sustainable payouts, my colleague Lawrence Ullman and I used Morningstar CPMS to find REITs above $200-million in market cap with the best combination of:
- Distribution yield;
- Price-to-FFO ratio (FFO, or funds from operations, is a commonly accepted and reported measure of REIT
- operating performance);
- Three-month consensus FFO estimate revision (cannot be negative);
- Twelve-month total return (cannot be negative);
- Payout ratios (distributions as a percentage of estimated FFO) were limited to no more than
- 75 per cent.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital-management services to high net-worth individuals, corporations, endowments, charities and foundations.
What we found
Our screen generated a fairly diverse group of six names within the REIT sector.
Agellan Commercial REIT has a diversified portfolio of income-producing office, industrial and retail properties in the United States and Canada.
Milestone Apartments REIT's portfolio consists of multifamily garden-style residential properties, located imetropolitan markets in the Southeast and Southwest United States.
Morguard North American Residential REIT invests in multiunit residential properties in Canada and the United States.
Choice Properties REIT was a real estate spinoff from Loblaw Cos. Ltd. and has a portfolio of supermarket-anchored shopping centres, stand-alone supermarkets and others.
Pure Industrial REIT acquires, owns and operates a portfolio of industrial properties in markets across Canada.
Killam Apartment REIT owns, manages and develops multifamily residential properties in Atlantic Canada, Ontario and Alberta.
Investors should be aware that REIT distributions consist of several sources of returns including other income, capital gains, foreign non-business income and return of capital, which are treated differently for taxation purposes.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.