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number cruncher

What are we looking for?

The Teranet-National Bank Composite House Price Index recently posted its biggest month-over-month decline since its inception in 1999. Rising interest rates, remote working, online ordering/shopping, COVID-19, supply chain issues and more have created headwinds across the general real estate sector. My team member Allan Meyer and I take a contrarian approach and analyze the sector using our investment philosophy focused on safety and value in hopes of finding some value or bargains. This includes both real estate corporations and real estate investment trusts that hold a variety of real estate types 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 via their distributions (if a trust) or dividends (if a corporation). We like to get paid while waiting for price appreciation, as many investors do. Yield is the projected annualized distribution or dividend divided by the 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 cashflow-based measures for this sector. It is the funds from operations with adjustments made for capital expenditures used to maintain the underlying real estate. In the table, payout is the projected distribution or dividend divided by the AFFO. Payout is a safety metric; a lower number is preferred, while anything over 100 could be a warning sign. Price/AFFO is the share price divided by the AFFO. It is a valuation metric, the lower the number, the better the value. Debt/equity is a leverage ratio and safety measure. A smaller number is better.

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

Which of these 20 TSX real estate names offer investors safety and value?

Rising interest rates, remote working, online ordering/shopping, COVID-19, supply chain issues and more have created headwinds

NameTickerMkt. Cap. ($ Bil.)Yield (%)Payout (%)P/AFFOD/E (%)Occup. Rate (%)52W Ttl. Rtn. (%)Recent Price ($)
Canadian Apt. Properties REITCAR-UN-T7.13.560.717.369.898.1-29.940.90
RioCan REITREI-UN-T5.65.565.910.787.096.8-13.118.36
Granite REITGRT-UN-T4.44.568.514.848.299.7-22.367.17
Choice Properties REITCHP-UN-T4.25.778.213.4185.497.1-9.612.64
SmartCentres REITSRU-UN-T3.77.188.812.199.397.4-11.825.29
Allied Properties REITAP-UN-T3.56.271.510.961.789.9-31.327.19
Tricon Residential Inc.TCN-T3.42.455.113.4149.195.0-25.712.15
Summit Indust. Income REITSMU-UN-T3.23.573.921.138.499.2-19.416.53
First Capital REITFCR-UN-T3.15.942.212.696.396.1-16.514.51
H&R REITHR-UN-T2.95.049.99.674.196.6-10.010.61
Dream Industrial REITDIR-UN-T2.76.477.811.751.198.2-33.110.54
NorthWest Hlthcare Prop. REITNWH-UN-T2.67.291.311.9131.497.0-15.210.60
Boardwalk REITBEI-UN-T2.12.435.714.793.395.7-4.845.31
Killam Apartment REITKMP-UN-T1.84.564.613.593.397.2-27.115.14
InterRent REITIIP-UN-T1.63.061.920.064.795.6-33.011.20
CT REITCRT-UN-T1.65.769.911.7166.999.3-12.314.69
Crombie REITCRR-UN-T1.56.184.213.3124.296.2-16.514.23
BSR REITHOM-U-T1.33.356.617.9107.596.03.021.17
Primaris REITPMZ-UN-T1.36.356.08.742.187.53.112.46
Artis REITAX-UN-T1.16.249.57.790.289.4-12.39.51
AVERAGE2.95.065.1113.3793.7095.90-16.90
MEDIAN2.85.665.2512.9691.7396.70-15.85

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Dream Industrial REIT DIR-UN-T and Primaris REIT PMZ-UN-T look attractive from a safety and value perspective. Primaris is also one of the few names with a positive total return over the past year. NorthWest Healthcare Properties REIT NWH-UN-T provides investors with the most income (yield). Boardwalk REIT BEI-UN-T has the lowest payout but also among the lowest yields. Summit Industrial Income REIT SMU-UN-T has the lowest debt while Artis REIT AX-UN-T boasts the best value. Granite REIT GRT-UN-T leads the way in occupancy and also looks interesting in other areas. The payout ratios are generally in good shape across the sector, which could hint at future dividend/distribution bumps.

Exchange-traded funds are an option for investors who like the sector but prefer to diversify away individual security risk; BMO Equal Weight REITs Index ETF (ZRE-T) and CI Canadian REIT ETF (RIT-T) are two examples.

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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