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Number Cruncher

Sizing up REITs for the long term Add to ...

What are we looking for?

Stable real estate investment trusts that can deliver attractive yields during market volatility.

More about today’s screen

With bond yields so low, yield hungry investors are having to look elsewhere for income. REITs may be one higher-risk asset class to consider, but often they get beaten up during an economic downturn – tenant occupancy and rents fall, capital for growth becomes scare and payout ratios start to look risky.

More related to this story

That said, some REITs can survive a downturn better than others. It may also be a good time to buy stable REITs for the long term if prices are down and valuations are more reasonable.

We’ll look for help on this today from Morningstar CPMS. Craig McGee, a senior consultant with CPMS, ran a screen looking for Canadian REITs with market caps above $500-million, flat or positive analyst revisions to cash flow estimates for 2012 and stable or growing distributions over at least the past five years.

“Focusing on REITs with improving expectations and a commitment to maintaining stable distributions could offer investors a reasonable payout while adding further diversification,” Mr. McGee said.

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus more than 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What did we find out?

Mr. McGee ran a test that compared the top half of Canadian REITs based on three-month cash flow estimate revisions (table) versus the bottom half. He reselected equally weighted portfolios for each half every quarter, with no market cap restrictions.

He found the top half has produced a total return of 14 per cent annualized since November, 2005, versus 8.3 per cent for the bottom half. The S&P/TSX total return index offered 6.1 per cent to investors over the same period.

Follow on Twitter: @ScottAdams_Edit

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