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number cruncher

What are we looking for?

How Canadian REITs compare in terms of their ability to generate cash flow.

The screen

When the Bank of Canada raises interest rates to combat rising inflation, the real estate market is heavily affected. Mortgage lenders followed the central bank’s lead by increasing lending rates and tightening mortgage approvals, thereby causing landlords to consider increasing rent to keep up with the change.

Real estate investment trusts, which own, operate, or finance income-generating real estate, constantly monitor these variables to ensure investors continue to receive a steady stream of income from invested money.

Given recent news regarding the real estate and rental markets, it is a good time to evaluate Canadian REITs as potential investment opportunities. Today we focus on a key performance indicator for the REIT market – funds from operations per share.

  • First, we screen for REITs traded in Canada with a market capitalization of more than $3-billion;
  • Next, we rank the REITs according to reported (actual) funds from operations per share, or FFO/share. FFO is a measure used by analysts to measure the amount of cash that flows in from a real estate trust’s regular business activity, such as rent. By converting FFO to a ratio over number of shares outstanding, it makes it easier to evaluate performance and compare it against others in the same industry.
  • Finally, to provide further insight into the variability of cash flow, we also include estimated FFO/share for the year ahead.

More about Refinitiv

Refinitiv, a London Stock Exchange Group business, is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.

What we found

TSX-listed real estate investment trusts

NameTickerMkt. Cap. ($ Mil.)FFO/Shr. Actual FY 2021FFO/Shr. Estim. FY 2022Div. Yld. (%)1Y Ttl. Rtn. (%)Recent Price ($)
Granite REITGRT-UN-T5,992.33.934.353.418.191.06
Allied Prop. REITAP-UN-T5,190.92.412.494.3-3.940.50
Cdn. Apartment Prop. REITCAR-UN-T8,387.12.262.423.0-0.148.16
SmartCentres REITSRU-UN-T4,343.
RioCan REITREI-UN-T7,112.91.601.664.412.422.99
H&R REITHR-UN-T3,402.01.531.124.36.712.17
First Capital REITFCR-UN-T3,573.
Choice Properties REITCHP-UN-T4,800.00.950.985.18.814.62
NorthWest Hlthcre. Prop. REITNWH-UN-T3,030.20.850.906.32.712.77
Dream Industrial REITDIR-UN-T3,548.30.810.895.05.613.96
Summit Indust. Income REITSMU-UN-T3,688.90.590.752.925.619.43

Source: Refinitiv

The screen, ranked by reported FFO/share, produced 11 REITs. Here are two to highlight:

Canadian Apartment Properties REIT, also known as CAPREIT, owns and manages interests in multiunit residential rental properties. It is the largest REIT in Canada, generating revenue of more than $738-million in fiscal year 2021, well above its sector peers. A backlog of immigration, caused by pandemic lockdowns and travel restrictions, should unwind in the coming years. The resulting acceleration in population growth will cause housing rental demand to increase, further improving this REIT’s top line figure.

Also, CAPREIT has taken advantage of the expiration of regulatory rental freezes in British Columbia and Ontario at the beginning of this year. It sent notices to about 44 per cent of tenants, advising them of a 1.3-per-cent rental increase, which took effect Jan. 1. The slight increase in rent will add to already strong FFO values.

Granite REIT is engaged in the acquisition, development, ownership and management of logistics, warehouse and industrial properties in North America and Europe. The trust generates the highest FFO/share value of its peers with $3.93 for fiscal year 2021 (and an estimated value of $4.35 for fiscal year 2022). Granite’s portfolio of properties is strictly commercial, which helps avoid high tenant turnover. This is supported by analysts, who expect Granite to report almost full occupancy of its properties (99.8 per cent) at fiscal year-end, according to Refinitiv data.

However, there is one large risk to the Granite’s success: Magna International Inc. is Granite’s largest tenant, accounting for about 29 per cent of annualized revenue in Granite’s fiscal fourth quarter 2021. Any downturn in the auto industry could pose a risk to Granite’s revenue as this would directly affect Magna’s ability to fulfill its lease obligations.

Investors are advised to do their own research before trading in any of the securities shown.

Erik Foo, CFA, is a proposition sales specialist at Refinitiv, covering research and portfolio management sales.

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