What are we looking for?
The S&P/TSX Capped REIT Index has fallen over 20 per cent from its pandemic-era high in March, 2022 owing to spiking interest rates and bond yields. We thought we would take a contrarian approach and analyze the sector using our investment philosophy focused on safety and value in hopes of finding some bargains. Analysts on the Street are generally forecasting future cash flow growth and the sector may look even more attractive should rates begin to fall. Our analysis includes both property companies and real estate investment trusts (REITs) that hold assets in a variety of real estate segments, such as commercial, office, residential, industrial, etc.
The Screen
We started with TSX-listed names in the real estate sector with a market capitalization of $1-billion or more, sorted from largest to smallest. Market cap is a starting point for safety – larger is better. The sector is known for providing shareholders with a high level of income through their distributions (if a trust), or dividends (if a corporation.) Allan and I like to get paid while we wait for price appreciation as many investors often do (it’s sort of like collecting rent).
Yield is the projected annualized distribution or dividend divided by the share price. Adjusted funds from operations (AFFO) are a key metric when analyzing real estate, and is often considered a more accurate predictor than earnings or cash-flow-based measures for this sector. AFFO measures the funds from operations, with adjustments made for capital expenditures used to maintain the underlying real estate. Payout is the projected distribution or dividend divided by the AFFO. A lower number is preferred, while anything over 100 could be a warning sign. Debt/equity measures leverage and is a safety metric – a smaller number is better. Price/AFFO is the share price divided by the AFFO. It is a valuation metric, the lower the number, the better the value.
We then looked at the occupancy rate or the percentage of rented spaces compared with available space. Typically, a higher number is favourable. Lastly, we’ve included the 52-week total return to track performance and the average and median numbers for easy comparison.
What we found?
REITs offering safety and value
| NAME | TICKER | MKT. CAP. ($B) | YIELD (%) | PAYOUT (%) | P/AFFO | D/E (%) | OCCUP. RATE. (%) | 52WK TTL RTN (%) | RECENT PRICE ($) |
|---|---|---|---|---|---|---|---|---|---|
| Canadian Apartment Properties REIT | CAR-UN-T | 7.8 | 3.1 | 61.1 | 18.7 | 74.1 | 98.3 | 17.0 | 46.50 |
| RioCan REIT | REI-UN-T | 5.6 | 5.7 | 61.8 | 10.6 | 91.2 | 97.4 | 7.5 | 18.78 |
| Granite REIT | GRT-UN-T | 4.6 | 4.4 | 62.8 | 14.1 | 57.6 | 99.6 | 11.6 | 72.63 |
| Choice Properties REIT | CHP-UN-T | 4.2 | 5.7 | 76.8 | 13.1 | 147.5 | 97.8 | 7.1 | 12.93 |
| Dream Industrial REIT | DIR-UN-T | 3.6 | 5.1 | 68.8 | 13.1 | 63.5 | 98.9 | 31.2 | 13.30 |
| SmartCentres REIT | SRU-UN-T | 3.4 | 7.8 | 84.7 | 10.9 | 96.2 | 97.6 | -2.0 | 23.37 |
| Boardwalk REIT | BEI-UN-T | 3.1 | 1.7 | 34.7 | 19.2 | 85.8 | 96.8 | 54.2 | 67.10 |
| First Capital REIT | FCR-UN-T | 2.9 | 6.2 | 73.2 | 11.7 | 102.4 | 95.8 | 1.4 | 13.80 |
| Tricon Residential Inc | TCN-T | 2.9 | 2.9 | 53.8 | 13.3 | 158.8 | 93.8 | -11.4 | 10.62 |
| H&R REIT | HR-UN-T | 2.5 | 6.1 | 54.9 | 8.9 | 74.2 | 96.6 | -5.2 | 9.72 |
| Allied Properties REIT | AP-UN-T | 2.4 | 9.4 | 75.4 | 7.7 | 66.1 | 89.6 | -26.2 | 18.70 |
| Killam Apartment REIT | KMP-UN-T | 2.1 | 3.9 | 62.5 | 15.5 | 88.8 | 98.7 | 22.4 | 17.84 |
| InterRent REIT | IIP-UN-T | 1.8 | 2.8 | 63.1 | 22.0 | 65.3 | 96.8 | 15.3 | 12.60 |
| CT REIT | CRT-UN-T | 1.5 | 6.2 | 69.6 | 10.9 | 165.1 | 99.3 | 0.2 | 14.10 |
| Crombie REIT | CRR-UN-T | 1.4 | 6.7 | 81.6 | 11.7 | 116.6 | 96.2 | -4.1 | 12.88 |
| NorthWest Healthcare Properties REIT | NWH-UN-T | 1.3 | 5.9 | 66.6 | 7.7 | 179.2 | 97.0 | -39.9 | 5.56 |
| Primaris REIT | PMZ-UN-T | 1.3 | 6.0 | 53.9 | 8.7 | 52.5 | 91.1 | 14.9 | 13.30 |
| Morguard Corp | MRC-T | 1.1 | 0.6 | 2.9 | 4.8 | 162.3 | 88.3 | -1.9 | 102.54 |
| AVERAGE | 3.0 | 5.0 | 61.6 | 12.4 | 102.6 | 96.1 | 5.1 | ||
| MEDIAN | 2.7 | 5.7 | 63.0 | 11.7 | 90.0 | 96.9 | 4.3 |
Refinitiv Eikon & Wickham Investment Counsel Inc.
Riocan, H&R, Primaris and Morguard look attractive from a safety and value perspective. Primaris has the lowest debt or leverage while Morguard has the lowest payout and best value, although the debt level is a bit high. Allied Properties provides investors with the most income (yield). Granite leads the way in occupancy and also looks interesting. The payout ratios are generally in good shape across the sector, which could hint at future dividend/distribution bumps. The valuations are also generally attractive.
ETFs are an option for investors who like the sector, but prefer to diversify away from individual security risk. BMO and CI offer REIT ETFs; the symbols are ZRE and RIT, 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.
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