Throughout
the last few months the REIT market has taken a beating. With all the talk of
rising interest rates and the problems with natural resources such as oil many
REIT’s are down quite a bit. I decided to look into the sector to better the
decision making of buying a REIT. Some REITS are down nearly 20-30% from their
highs, so I decided to take a look as to if these drops are warranted or just
speculation.
The Drop in
REIT’s has mostly been caused by interest rates. Does this make sense? Yes they
are greatly affected by the interest rates but realistically the US may rise
rates but their economy and Canada’s are actually declining. This is not the
time to rise interest rates. And as of late in Canada there have been talks of another
rate cut. If they cut rates it helps REIT’s so I don’t consider the drop in
price at this point warranted rather it is a buying opportunity.
I decided to
look at some of the major REIT’s and do a comparison of the price,
distributions, AFFO, and payout ratio. AFFO and payout ratio are the most
important metrics when it comes to a REIT as they let you know basically income
per unit and the payout shows if the yield is sustainable over the long term.
I consider a
high yield in some companies a danger sign or a trap to get you in before they
slash it or reduce it greatly. REIT’s are different in this way but we still
need to ensure the payout can be sustained. I consider over 90% payout ratio on
a REIT unsustainable over the long term, I also consider around the 80-90%
range where you would like the payout to be.
Yield is the
other metric I look to, this is the actual %yield you will be paid based on the
stock price. I don’t like stocks with less the 3% yield, but REIT’s are quite
different as they don’t have the growth potential of most stocks rather they
are more on an income fund. Therefore you want to invest in the REIT with a high
yield but payout ratio below 90%.
Also right
now as many of these REIT’s have been sold off there is an opportunity to get
your high yield along with some growth as the REIT’s correct (at least in my opinion).
Below I have highlighted some of the larger REIT’s and their metrics to help in
my decision making.
Riocan
For example
REI is one of the largest REIT’s with a high quality client list including
Walmart, Canadian Tire, Cineplex, Loblaws, Metro. It is held in almost every
REIT ETF as the largest holding is down more the 13% from its high. Its payout is
around 90% and its yield is 5.4%. This represents a good buying opportunity for
this stock at a nice discount. Also it should be noted that REI’s payout was
over well over 90% for the past two years but they management have worked
diligently to get it into a more manageable level.
H&R
H&R is
another good REIT with favorable metrics; down 11% for its high with a 6% yield
and a payout of 88% this large REIT also represents a good option with American
exposure. It holds 41 office properties, 164 retail properties, 107 industrial
properties, 3 residential properties and 2 development projects.
Dream Office REIT
D.UN is yielding
over 9%! That is a huge yield and down nearly 20% from its 52 week high. From a
payout ratio standpoint its at 90% which is fine especially for such a high yield,
but there is one thing that bothers me about this and it is the diversity. D.UN
is an office REIT meaning it rents office to clients across Canada. If you feel
the office sector is safe this is a great beat to make some money on a high yield
but to me it seems to good to be true and I feel more comfortable with the
diversity of companies like RioCan.
Artis REIT
I knew very
little about this company when I started this post but have learned quite a
bit. Its metrics are great, stock down 15%, yield over 7%, and payout ratio
less than 85%. I consider these metrics perfect for a REIT with some room to
grow that yield or add to the portfolio. AX.UN owns quality office retail and
industrial property which gives some diversity. They own 25.2% retail, 23.1%
Industrial and 51.7% office space. They also have properties in both Canada and
the United states with 241 properties, a massive amount of leasable space and a
94.7% occupancy rate this REIT looks pretty attractive. They also have some
high quality occupants such as Bell, Homedepot, Sobeys, #M, TD Trust, Shoppers,
AMEC and both federal and provincial office buildings. I believe at the current
levels and metrics this represents a great buy, my only concern is many
holdings in Alberta but they are high quality and I believe it will not hurt
the core business.
Conclusion
I believe the
REIT sector right now represents a great buying opportunity and I do not think interest
rates if they do rise will be by a very high percentage. Therefore, I believe
this is a great opportunity to purchase some of these REIT’s at a discount and
cash in on the long term yields. I intend to initiate a position shortly in a
Canadian REIT but some more research is required before I do so.
