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number cruncher

Aerial shot of Calgary skyline showing the new Bow building on the right.Chris Bolin

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 screen

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.