What are we looking for?
Reasonably priced REITs with room to grow.
The screen
Real estate investments are often counted on for their diversification benefits, income generation and long-term growth opportunities. Real estate investment trusts allow investors to earn a share of income produced on a large basket of properties. Year-to-date, the S&P USA REIT total return index has posted a return of 8.8 per cent (in U.S. dollars). Locally, the S&P/TSX capped REIT total return index has returned 17.2 per cent.
Following the close of trading on Aug. 31, 2016, real estate will be moved out of the financials sector and promoted to its own sector under the Global Industry Classification Standard (GICS) structure. This will include most equity REITs excluding the mortgage REIT industry. Although this move could be considered more of a simple reshuffling of the deck since company sizes and index weighting won't really change, it will help to demonstrate the prominence and importance of the sector as an asset class and improve its visibility with investors.
In order to identify some U.S. or Canadian REITs demonstrating growth and sustainable payouts while trading at reasonable valuations, my colleague Lawrence Ullman and I used Bloomberg to find the top 15 companies above $500-million in market cap and the best mix of:
- Distribution yield (must be greater than 4 per cent);
- Forward-price-to-FFO ratio (FFO, or funds from operations, is a commonly accepted and reported measure of REIT operating performance) – lower values are favoured;
- Three-month FFO consensus estimate revision (cannot be negative);
- Next quarter’s expected year-over-year FFO growth (cannot be negative);
- FFO payout ratio – must be less than 90 per cent (distribution per share as a percentage of FFO).
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Using Bloomberg we performed a back-test starting May 31, 2006, reselecting an equally weighted portfolio of the top 15 qualifying REITs every three months.
Over the entire period, this strategy would have generated an annualized total return of 9.5 per cent compared with 7.1 per cent for the S&P USA REIT total return index. Over the past year, this strategy would have posted a return of 13.1 per cent compared with 10.3 per cent for the index.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto. Richardson GMP Ltd. is a member of Canadian Investor Protection Fund.
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