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number cruncher

What are we looking for?

Soaring property prices and low mortgage rates have made the real estate market a hot topic in the media and within social circles. My team member Allan Meyer and I thought we would analyze the Canadian real estate sector using our investment philosophy focused on safety and value. This includes both corporations and real estate investment trusts that hold a variety of asset types such as commercial, office, residential and industrial.

The screen

We started with TSX-listed names with a market capitalization of $1-billion or more, sorted from largest to smallest. Market cap is a starting point for safety – larger is better. The sector is known for providing shareholders with a high level of income through distributions (trusts), or dividends (corporations). Yield is the projected annualized distribution or dividend divided by the unit or share price.

When analyzing real estate, 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. In our screen, payout is the projected distribution or dividend divided by the AFFO. A lower number is preferred, while anything above 100 could be a warning sign, suggesting the REIT or company may not have enough funds to sustain its payout over the long term.

Debt-to-equity is a leverage ratio and safety measure. A smaller number is better.

Price/AFFO is the unit or share 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. Typically, a higher number is favourable.

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

What we found

Select TSX-listed real estate sector names

NameTickerMkt. Cap. ($ Bil.)Yield (%)Payout (%)Debt/Eqty. (%)Price/AFFOOccup. Rate (%)52W Ttl. Rtn. (%)Recent Price ($)
Canadian Apt. Properties REITCAR-UN-T10.62.462.162.226.397.533.461.34
RioCan REITREI-UN-T7.14.360.386.414.195.754.122.47
Granite REITGRT-UN-T6.03.372.742.421.999.619.591.33
Allied Properties REITAP-UN-T5.53.973.550.318.692.118.943.38
Choice Properties REITCHP-UN-T4.95.080.1184.916.197.122.014.89
H&R REITHR-UN-T4.74.246.599.010.895.065.516.41
SmartCentres REITSRU-UN-T4.46.090.0104.414.997.058.030.58
First Capital REITFCR-UN-T4.02.437.3106.315.796.234.818.10
Summit Indust. Income REITSMU-UN-T3.72.680.150.730.998.086.821.70
Tricon Residential Inc.TCN-T3.41.872.3185.926.995.047.915.98
NorthWest Hlthcre. Prop. REITNWH-UN-T2.96.191.0128.615.097.119.813.21
InterRent REITIIP-UN-T2.41.957.359.231.291.337.217.44
Killam Apartment REITKMP-UN-T2.43.266.294.720.595.124.321.66
WPT Industrial REITWIR-UN-T2.30.067.477.720.998.269.727.44
Boardwalk REITBEI-UN-T2.22.136.1104.616.896.358.547.02
Cominar REITCUF-UN-T2.03.335.5131.710.891.759.511.00
CT REITCRT-UN-T1.84.870.7172.614.799.329.517.51
Crombie REITCRR-UN-T1.84.987.2156.217.996.445.218.29
Artis REITAX-UN-T1.55.152.294.910.089.939.111.58
Dream Office REITD-UN-T1.24.365.379.715.385.223.923.36
Average3.73.665.2103.618.595.242.4
Median3.13.666.897.016.596.238.2

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

RioCan REIT and H&R REIT score well across the board for safety and value. Artis REIT and Dream Office REIT also look interesting but have some of the lowest occupancy rates on the list. Perhaps that makes them potential “rebound plays.” Artis also boasts the best value. Granite REIT has the highest occupancy rate and the lowest leverage while NorthWest Healthcare Properties REIT has the best yield. The payout ratios are generally in good shape across the sector, with Cominar REIT having the lowest. One wonders whether we could see a future bump in Cominar’s distribution as a result.

Exchange-traded funds, such as BMO Equal Weight REITs Index ETF (ZRE) or CI Canadian REIT ETF (RIT), are an option for investors who like the sector but prefer to diversify away individual security risk.

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.

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