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number cruncher

What are we looking for?

Fears of rising bond yields have sparked a sell-off in the Canadian REIT sector in recent months. This pullback prompted my associate Allan Meyer and I to take a closer look at the sector using our investment philosophy focused on safety and value.

The screen

We started with Canadian-listed real estate investment trusts with a market capitalization of $1-billion or more.

REITs are known for their high yields. Allan and I like to get paid while we wait for capital appreciation and distributions generally reflect safety and stability. Yield is based on the share price divided by the annualized distributions.

When analyzing REITs, adjusted funds from operations (AFFO) is a key metric and often considered a more accurate predictor than earnings or cash flow-based measures. The "adjusted" in AFFO is simply referring to funds from operations (FFO) with adjustments made for capital expenditures used to maintain the underlying real estate.

Payout is the distribution payments divided by the AFFO. A lower number is preferred and implies safety in the distribution – and could signal a future distribution bump. The opposite is true for a number over 100.

Price/AFFO is the current share price divided by the AFFO. It is a valuation metric – again, the lower the number, the better the value.

We also looked at debt to equity as a leverage ratio and safety measure. A smaller number translates to lower leverage and debt levels. As we like to tell clients, it's difficult to go bankrupt without owing any debt obligations. We've capped debt to equity at 150 per cent; this is something we like to do for many sectors and industries.

Lastly, we looked at the occupancy rate or the percentage of rented spaces to available space. A higher number is preferred.

Note that we've included the average and median numbers in each category at the bottom of the table for easy comparison.

What did we find?

H&R, Granite and Pure Industrial look attractive on most measures. H&R is Canada's second-largest REIT and could be a play on a future rebound in Western Canada. The higher payout and lower occupancy rate of Dream Global should be noted.

Exchange-traded funds are an option for investors who like the sector, but prefer to diversify away individual security risk. Two examples are the BMO Equal Weight REITs Index ETF (ZRE) and the First Asset Canadian REIT ETF (RIT).

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

Select TSX-listed REITs

CompanyTickerMarket Cap ($Bil)Div. Yield (%)Payout (%)P/AFFODebt to Equity (%)Occupancy Rate (%)
RioCan REITREI.UN-T8.55.4%91.7%17.170.8%95.2%
H&R REITHR.UN-T6.06.6%75.9%11.592.5%95.9%
Canadian Apt. Properties REITCAR.UN-T4.14.1%70.8%17.284.2%97.5%
Smart REITSRU.UN-T3.95.6%77.1%13.8102.3%98.7%
Canadian REITREF.UN-T3.34.1%66.4%16.158.6%93.8%
Allied Properties REITAP.UN-T2.84.5%70.9%15.571.4%91.3%
Cominar REITCUF.UN-T2.510.6%88.7%8.4112.0%91.9%
Boardwalk REITBEI.UN-T2.05.1%77.9%15.277.0%97.3%
Granite REITGRT.UN-T2.05.7%78.6%13.028.0%99.0%
Dream Office REITD.UN-T1.98.5%73.2%8.6110.5%91.3%
Artis REITAX.UN-T1.79.3%86.1%9.2109.6%92.7%
Milestone Apartments REITMST.UN-T1.44.1%45.5%11.3115.3%95.5%
CT REITCRT.UN-T1.34.6%70.4%14.871.2%99.9%
Pure Industrial REITAAR.UN-T1.36.0%77.9%13.083.1%94.6%
Dream Global REITDRG.UN-T1.28.6%97.7%11.395.4%86.8%
Average2.96.2%76.6%13.185.5%94.8%
Median2.35.7%76.9%13.084.8%95.0%

Source: Thomson Reuters, Wickham Investment Counsel Inc.