What are we looking for?
Global growth appears to have receded slightly in the past few weeks. This leads us to believe that interest rates will not rise until perhaps mid-year 2013. That being the case, Canadian REITs will continue to benefit from strong fund flows from investors looking for yield.
My colleague Sean Pugliese and I looked at REITs based on yield, and on the AFFO, the adjusted funds from operations.
The AFFO is equal to the FFO, funds from operations, with adjustments made for recurring capital expenditures used to maintain the REIT’s underlying assets. To calculate the AFFO of a real estate investment trust you must subtract all items that don’t really add value to the property. For example, a new roof is a necessary expense and usually capitalized, but the building had a roof before the new roof, and now it still does, so the overall value of the building has not been increased.
Today’s screen looks at 24 Canadian REITs that are ranked by the highest distribution yield to the lowest. The AFFO payout is the distribution divided by the AFFO. The distribution yield shown is current, and the AFFO is forward-looking based on analysts’ estimates. The latter shows the safety of the distribution and is a good predictor of the REIT’s ability to pay future distributions. We are looking for a low number.
The price-to-AFFO in the accompanying table is a valuation metric. It is the current share price divided by the estimated AFFO, and a lower number is desirable.
What did we find?
If we look for distribution yields over 6 per cent, with low AFFO payouts and low P/AFFO, then Innvest REIT tops the chart. Innvest is the largest franchisor of hotels in Canada with 140 properties and 18,200 rooms. Artis REIT is also attractive. Artis owns office, retail and industrial properties in Canada and the United States. Pure Industrial is suitable with its 6.06 per cent yield. Even though Cominar comes in a shade below 6 per cent on yield, it is the largest commercial real estate property owner and manager in Quebec.
Mr. Bowman is a portfolio manager at Wickham Investment Counsel Inc. in Hamilton. firstname.lastname@example.org
Companies & investments Mentioned In This Article (22)
PAR.UN-T 5.58 -0.357 % 3,058 InterRent REIT
IIP.UN-T 5.55 -0.359 % 1,486 CAP REIT
CAR.UN-T 20.87 0.337 % 8,149 Northern Property REIT
NPR.UN-T 27.95 0.612 % 4,038 Crombie REIT
CRR.UN-T 13.31 0.529 % 1,065 Calloway REIT
CWT.UN-T 25.76 -0.155 % 7,199 Retrocom REIT
RMM.UN-T 4.71 0.426 % 8,110 InnVest REIT
INN.UN-T 5.13 -0.581 % 17,985 Brookfield Canada Office Prop.
BOX.UN-T 25.49 -0.74 % 4,269 Pure Industrial Real Estate
AAR.UN-T 4.76 -0.21 % 13,300 Chartwell Retirement Residence
CSH.UN-T 10.16 0.099 % 10,895 Morguard Real Estate Inv Trust
MRT.UN-T 16.75 -0.475 % 1,476 Dundee International REIT
DI.UN-T 9.24 0.763 % 7,798 Cdn. Real Estate Investment
REF.UN-T 44.40 0.339 % 3,966 Artis REIT
AX.UN-T 15.66 -0.064 % 9,637 Allied Properties REIT
AP.UN-T 33.76 0.178 % 1,719 Northwest Healthcare Prop REIT
NWH.UN-T 9.77 0.308 % 6,049 Cominar REIT
CUF.UN-T 18.30 0.494 % 18,550 H&R Real Estate Invest. Trust
HR.UN-T 22.63 0.355 % 38,827 Boardwalk REIT
BEI.UN-T 59.08 0.459 % 1,428 Dundee REIT
D.UN-T 28.59 0.316 % 14,696 RioCan Real Estate Investment
REI.UN-T 26.43 -0.189 % 25,219