What are we looking for?
Canadian real estate investment trusts (REITs) with outstanding yield and valuations.
The Bank of Canada's decision on Jan. 21 to cut its key interest rate by one quarter point led to a five day rally in Canadian stocks as market participants reacted to this unexpected news. Since then, numerous sources have gone on to predict another rate cut in the spring to further protect the Canadian economy from the shock of falling oil prices. In this declining interest rate environment, high yield assets such as REITs become increasingly attractive to income seeking investors.
We will be using Recognia Strategy Builder to search for Canadian REITs with strong yields and reasonable valuations.
We begin by setting a minimum market cap threshold of $100-million. Smaller REITs tend to be more volatile and are subject to additional risk so we wish to look at the larger end of the REIT market.
Next, we will look for REITs with strong yields. We will screen for REITs with an annual yield of at least 4 per cent. In addition, to find REITs with healthy, profitable businesses, we will select only trusts with operating margins of 25 per cent or more. Operating margin is a measure of business efficiency which indicates how much profit an enterprise makes on each dollar of incremental revenue.
Finally, to ensure we are not overpaying for our investment, we will look for REITs with reasonable valuations as measured by their forward price-earnings ratio. We will select only trusts with forward P/E of less than 16.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Cominar Real Estate Investment Trust ranks No. 1 on our screen. Cominar owns more than 500 office, retail and industrial properties primarily in Quebec, Ontario and Atlantic Canada. The trust has a yield of 7.6 per cent and a forward P/E of 10.8 that is reasonable compared to its peers.
RioCan Real Estate Investment Trust is the largest trust on our list with a market capitalization of $9.2-billion. RioCan owns a portfolio of over 350 commercial real estate properties across Canada and the United States. The trust yields 4.8 per cent and has the third-highest operating margin on our list at 62.1 per cent. RioCan units have also performed extremely well in the past year, up 19 per cent in total.
Morguard North American Residential Real Estate has the best valuation of any trust on our list with a forward P/E of just 7.2. This trust focuses on multi-unit residential properties in Canada and the United States. Morguard units have also delivered good market performance in the past year, up 9.4 per cent.
Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 10.7 per cent annualized return compared to 5.5 per cent for the S&P/TSX 60 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.