Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.
What are we looking for?
Value in Canada's REIT sector.
A recent study by Fidelity showed that adding real estate investment trusts to a traditional stock and bond portfolio increased the Sharpe ratio, a metric which indicates whether a portfolio's return is due to smart investment decisions or simply the result of excess risk.
The greater a portfolio's Sharpe ratio (developed by Nobel laureate William Sharpe), the better the risk-adjusted performance has been. Over the past 10 years, even a 10-per-cent allocation to REITs boosted the Sharpe ratio by 25 per cent.
The screen
My colleague Rob Belanger and I screened the Canadian REIT sector for companies at $500-million or more in market capitalization, and ranked them from the largest to the smallest.
The adjusted funds from operations (AFFO) is funds from operations (FFO) minus all items that don't really add value to the property. The price/AFFO is a valuation metric, and is the share price divided by the AFFO. We are looking for a low number.
The EV/EBITDA (enterprise value divided by the earnings before interest, taxes, depreciation and amortization) is a value ratio that looks at a firm the way a potential acquirer would, and a low number is preferred.
We only showed companies that had a dividend yield greater than 2 per cent. The dividend payout ratio is the dividend divided by the earnings, and we are looking for a low number.
The debt-equity ratio indicates the proportion of shareholders equity and debt used to finance the company's assets. A high debt to equity indicates a company may not be able to generate enough cash to satisfy its debt obligations.
Operating profit margin (OPM) is a measure of what portion of a company's revenue is left over after paying for the variable costs of operations, and we are looking for a high number.
The earnings yield (earnings per share divided by the current market price) is the inverse of the P/E ratio and shows the percentage of each dollar invested in the stock that was earned by the company. We are looking for a high number.
What did we find?
Dream Global REIT is a diversified REIT with 279 properties across Germany. It has the highest yield on our screen, the second-lowest payout ratio and the lowest EV/EBITDA.
An honourable mention goes to Pure Industrial REIT. The company has 170 properties mainly in Canada and outperforms the averages in five of the seven categories.
Investors should conduct further research or contact an investment professional before buying any of the companies listed here.