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What are we looking for?

Canadian REITs with attractive yields and valuations.

The screen

The first quarter of 2017 is now in the books with most sectors contributing relatively strong performance.

The S&P/TSX composite total return index came in with a gain of 2.4 per cent, despite a loss of 5.5 per cent from its second-largest sector, energy, which has seen increased volatility on the uncertainty around oil and gas prices. If we removed energy stocks from the index, it is estimated the S&P/TSX would have realized a total return of 4.6 per cent. The real estate sector has also been one of the stronger contributors, posting a gain of 4.7 per cent in the first quarter. In fact, real estate investment trusts have shown impressive resilience – the S&P/TSX capped REIT total return index has risen 30 per cent since the low seen on Jan. 18, 2016.

In order to identify potentially attractive REITs with reasonable valuations and sustainable payouts, my colleague Lawrence Ullman and I used Morningstar CPMS to find the top 10 REITs above $200-million in market cap with the best combination of:

  • Distribution yield;
  • Price to FFO ratio (FFO, or funds from operations, is a commonly accepted and reported measure of REIT operating performance);
  • Three-month consensus FFO estimate revision (cannot be worse than minus 5 per cent);
  • 12-month total return (cannot be negative).

Payout ratios (distributions as a percentage of estimated FFO) were limited to no more than 85 per cent and distributions must have been maintained or increased over the past year.

More about the Ullman Group

The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

We used CPMS to perform a back-test starting Feb. 28, 2007, selecting an equally weighted portfolio of up to 10 qualifying REITs. Universe rankings were regenerated monthly and holdings were replaced if their rank fell outside of the top half, if consensus estimates fell more than 10 per cent over three months or if distributions were cut.

Over the 10-year period, this strategy would have generated an annualized total return of 7.7 per cent compared with 5.6 per cent for the S&P/TSX capped REIT total return index. Following the strategy over the latest 12 months would have resulted in a gain of 19.7 per cent, while the index posted a return of 17 per cent.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.

Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

Attractively valued Canadian REITs

RankCompanyTickerMarket Cap ($Mil)Distribution Yield (%)P/FFO3M FFO Revision (%)12M Total Return (%)FFO Payout (%)
1Pure Industrial REITAAR.UN-T1,496.
3Agellan Comm. REITACR.UN-T374.16.89.1-3.532.162.0
4Northview Apt. REITNVU.UN-T1,090.37.510.2-1.425.676.2
5Artis REITAX.UN-T1,992.28.29.0-0.711.573.5
6WPT Ind. REITWIR.U-T593.15.913.1-
7Granite REITGRT.UN-T2,192.25.613.5-1.431.075.5
8Slate Retail REITSRT.UN-T551.57.48.4-4.114.462.8
9Morguard N.A. Res. REITMRG.UN-T498.34.312.3-0.829.753.3
10Summit Industrial REITSMU.UN-T275.87.810.4-2.313.980.6

Source: Morningstar CPMS