What are we looking for?
Canadian real estate investment trusts with strong yields and reasonable valuations.
Bonds have been a hot asset class of late with prices soaring over the past weeks and months. In Germany and Japan, bond yields have now declined to the point where they are now offering negative interest rates for bond durations out to 15 years. Though Canadian bonds are not offering negative rates of return, their yields are still very low. Income-seeking investors are increasingly turning their attention toward REITs as a source of dependable monthly income.
The screen
We will use Recognia Strategy Builder to search for REITs that meet our criteria.
We begin by setting a minimum market cap threshold of $200-million. Smaller REITs tend to be more volatile and are subject to additional risk, so we wish to look at the larger end of the REIT market.
Next, we will look for REITs with strong yields. We will screen for REITs with a yield of at least 4 per cent a year. In addition, to find REITs with healthy, profitable businesses, we will select only trusts with operating margins of 25 per cent or more. Operating margin is a measure of business efficiency that indicates how much profit an enterprise makes on each dollar of incremental revenue.
Finally, to ensure we are not overpaying for our investment, we will look for REITs with reasonable valuations as measured by their price-to-earnings ratios. We will select only trusts with a forward P/E of less than 20.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Cominar Real Estate Investment Trust ranks No. 1 on our screen. Cominar owns more than 500 office, retail and industrial properties primarily in Quebec, Ontario and Atlantic Canada. The trust has a yield of 8.6 per cent and a forward P/E of 9.7, which is reasonable compared with its peers.
OneREIT specializes in owning and operating retail shopping malls with 57 properties located in eight provinces. OneREIT currently offers a 7.6-per-cent dividend yield and has the lowest forward P/E ratio on our list at 8.6. This trust has had particularly strong performance of late with the unit price up 14 per cent in the month of June alone.
RioCan REIT is the largest trust on our list with a market capitalization of $9.1-billion. RioCan owns a portfolio of more than 350 commercial real estate properties across Canada and the United States. The trust yields 5 per cent and has the highest operating margin on our list at 45.6 per cent. RioCan units have also performed extremely well this year, currently up 19 per cent year-to-date.
Historical performance
Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 7.3-per-cent annualized return compared with 1.8 per cent for the S&P/TSX 60 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.