What are we looking for?
High yielding and underleveraged real estate investment trusts (REITs) trading in the United States that can be considered undervalued based on a relative valuation to the industry average.
Adding REITs to a portfolio is a great way to diversify and collect a constant stream of income while benefiting from stock appreciation. The objective of this exercise is to identify REITs trading in the United States with a dividend yield greater than 5 per cent that also show three metrics – lower price to funds from operations (P/FFO), price to adjusted funds from operations (P/AFFO) and total debt to total capital ratios – that are lower than the industry average.
FFO and AFFO are key operating metrics in the real estate industry. FFO measures the REIT's true net income by adding back depreciation and subtracting (or adding) any gains (or losses) from the sale of property. AFFO provides a more precise measure of a REIT's cash flow by deducting capital expenditures from FFO. A great gauge of a company's financial leverage is the total debt to total capital ratio. It takes a look at the percentage of total debt compared with total capital, which consists of debt, equity and minority interest.
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What did we find?
Thomson Reuters Eikon's screener determined 13 U.S. REITs that are yielding at least 5 per cent and have lower leverage levels than the industry. Agree Realty Corp. has a healthy balance sheet and a respectable level of leverage, which could bode well in an increasing interest rate environment. Furthermore, the company increased its dividend twice in 2014 and is expected to pay out 76 per cent of AFFO in dividends in 2015.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.