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What are we looking for?

Rising interest rates have sparked a sell-off in the Canadian REIT sector recently. This pullback prompted my associate, Allan Meyer, and I to be opportunistic and 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. This can be viewed as a safety factor as larger companies tend to be more liquid and stable.

Debt-to-equity is 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.

REITs are known for providing shareholders with a high level of income through their distributions. Distributions are the REIT version of a dividend. Mr. Meyer and I like to get paid while we wait for capital appreciation and distributions generally reflect safety and stability. Yield is based on the projected annualized distribution divided by the unit price.

When analyzing REITs, adjusted funds from operations (AFFO) is a key metric and often considered a more accurate predictor than measures based on earnings or cash flow. It is the funds from operations with adjustments made for capital expenditures used to maintain the underlying real estate. Distribution payout ratio is the distribution payments divided by the AFFO. A lower number is preferred. It implies safety in the distribution and could signal a future bump. The opposite is true for a payout more than 100.

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

We then looked at the occupancy rate, or the percentage of rented spaces compared with available space. A higher number is preferred.

Lastly, we've included the data's average and median numbers for easy comparison.

What did we find?

Seventeen REITs emerged in our screen; they are ranked by market cap in the accompanying table.

H&R looks attractive on most measures. Cominar could be a value and income play, but it should be said that its debt levels are on the high side.

Exchange-traded funds are an option for investors who like the sector but prefer to diversify away individual security risk. Two such funds are BMO Equal Weight REITs Index ETF (ZRE) and 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 Canadian real estate investment trusts

Company TickerMarket Cap ($Bil)Debt/Equity (%)Dist. Yield (%)Dist. Payout Ratio (%)P/AFFOOccupancy (%)
RioCan REITREI.UN-T7.872.25.984.414.495.6
H&R REITHR.UN-T6.187.86.677.811.895.7
First Capital Realty Inc.FCR-T4.990.44.377.918.095.0
Canadian Apartment Properties REITCAR.UN-T4.583.33.971.518.398.6
Smart REITSRU.UN-T4.1103.35.578.514.298.3
Canadian REITREF.UN-T3.359.94.159.614.694.8
Allied Properties REITAP.UN-T3.370.23.971.918.292.1
Cominar REITCUF.UN-T2.4113.011.293.78.992.4
Granite REITGRT.UN-T2.433.05.178.714.998.1
Boardwalk REITBEI.UN-T2.282.24.793.119.895.7
Artis REITAX.UN-T2.099.78.293.711.591.9
Dream Global REITDRG.UN-T1.788.27.691.011.988.6
Pure Industrial Real Estate TrustAAR.UN-T1.775.74.972.114.797.7
CT REITCRT.UN-T1.3215.34.871.614.699.7
Choice Properties REITCHP.UN-T1.2692.95.684.515.098.9
Crombie REITCRR.UN-T1.2172.46.682.512.594.4
Northview Apartment REITNVU.UN-T1.1155.17.777.810.190.7
Average3.0135.05.980.014.395.2
Median2.488.25.578.514.695.6

Source: Thomson Reuters Eikon, Wickham Investment Counsel Inc.

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