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What are we looking for?

My associate, Allan Meyer, and I thought we would analyze Canadian real estate investment trusts (REITs) using our investment philosophy focused on safety and value. The sector has performed well in spite of rising interest rates over the past year.

The screen

We started with Canadian-listed REITs with a market capitalization of $1-billion or more, sorted from largest to smallest. This is a safety factor as larger companies tend to have more diversified revenue streams, stability and liquidity.

REITs are known for providing shareholders with a high level of income through their distributions. Mr. Meyer and I love to get paid while we wait for capital appreciation and distributions generally reflect safety and stability. Distribution yield is based on the projected annualized distribution divided by the share price.

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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. It is the funds from operations with adjustments made for capital expenditures used to maintain the underlying real estate.

The price to AFFO ratio is the current share price divided by the AFFO. It is a valuation metric – the lower the number, the better the value.

Distribution payout is the projected distribution payments divided by the AFFO. A lower number is preferred and implies safety in the distribution and perhaps the ability for an increase. Anything more than 100 is a warning sign.

Debt/equity is a leverage ratio and safety measure. A smaller number translates to lower leverage and debt levels.

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

Lastly, we’ve included the 52-week total return to track performance and the average and median numbers for easy comparison.

What did we find?

H&R looks attractive on most safety and value metrics. Cominar REIT scores well for value and income, but the debt levels are a bit on the high side. Artis REIT is the highest yielding name on the list, but it is also the only name with a distribution payout of more than 100 per cent.

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ETFs are an option for investors who like the sector, but prefer to diversify away individual security risk. BMO and First Asset offer Canadian REIT ETFs, the symbols are ZRE-T and RIT-T respectively.

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 Ticker Market Cap ($Bil) Recent Price ($) Dist. Yield (%) Dist. Payout Ratio (%) Debt/Equity (%) Price/AFFO Occupancy Rate (%) 52Wk Total Rtrn (%)
RioCan REIT REI-UN-T 7.8 25.33 5.7 87.3 77.1 15.2 96.6 13.0
Canadian Apartment Properties REIT CAR-UN-T 6.8 46.75 2.8 66.2 71.7 23.1 98.7 42.8
H&R REIT HR-UN-T 5.8 20.36 6.8 80.5 87.1 11.9 95.6 3.2
First Capital Realty Inc. FCR 5.2 20.31 4.2 72.0 92.0 16.9 96.1 6.1
Allied Properties REIT AP-UN-T 4.3 43.30 3.6 75.1 49.6 20.7 95.8 17.1
SmartCentres REIT SRU-UN-T 4.2 31.36 5.6 77.0 104.6 13.5 98.2 10.0
Choice Properties REIT CHP-UN-T 3.5 12.58 5.9 81.6 221.1 13.9 98.9 1.7
Dream Global REIT DRG-UN-T 2.8 14.76 5.4 84.1 84.1 15.5 87.5 39.3
Granite REIT GRT-UN-T 2.5 54.56 5.0 85.9 32.4 16.4 98.4 13.8
Boardwalk REIT BEI-UN-T 2.3 50.25 2.0 41.7 86.3 20.9 94.3 31.5
Cominar REIT CUF-UN-T 2.2 12.21 5.9 62.6 112.8 10.2 92.6 -2.6
Artis REIT AX-UN-T 1.9 12.60 8.6 105.7 95.7 12.3 91.6 3.2
Northview Apartment REIT NVU-UN-T 1.5 25.78 6.3 77.2 131.6 12.2 92.4 23.2
Dream Office REIT D-UN-T 1.5 24.41 4.1 69.3 107.9 16.9 90.4 22.1
Killam Apartment REIT KMP-UN-T 1.4 16.00 4.0 67.6 118.5 17.1 97.0 28.3
CT REIT CRT-UN-T 1.2 13.45 5.4 64.9 215.1 11.6 98.6 2.0
Crombie REIT CRR-UN-T 1.2 13.33 6.7 74.0 159.4 11.1 95.2 6.2
InterRent REIT IIP-UN-T 1.2 11.39 2.4 57.7 86.2 24.3 97.9 49.0
NorthWest Healthcare Properties REIT NWH-UN-T 1.2 11.44 7.0 90.2 323.7 12.9 95.9 11.2
Average 3.1 5.1 74.8 118.8 15.6 95.4 16.9
Median 2.3 5.4 75.1 95.7 15.2 95.9 13.0

Source: Thomson Reuters and Wickham Investment Counsel Inc.

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