The Canadian REITs we’ve discovered provide investors with a compelling narrative going into 2019
SmallCapPower | December 20, 2018: As the U.S. Federal Reserve and Bank of Canada tighten monetary policy, rising interest rates impact some industries more than others. Real estate is one such industry that is particularly sensitive to changes in interest rates, as real estate purchases often involve a great deal of leverage, in the form of mortgages. Not surprisingly, rising interest rates increase financing costs, potentially lowering demand for real estate. REITs that utilize relatively lower leverage and higher equity to finance purchases, as well as REITs that have a high proportion of fixed rate mortgages, may fare better than peers as rates rise. One of the most common industry metrics to value REITs is called Funds from Operations (FFO), which serves as a proxy for cash flows, by adding depreciation back to net income. Today we have identified three Canadian REITs that could perform well in 2019.
*Market Cap and share prices as of December 18, 2018. FFO and FFO Margin data was obtained from Capital IQ, as of the latest fiscal year. FFO Margin is calculated as FFO/Revenue.
Canadian Apartment Properties REIT (TSX:CAR.UN) – $45.41
Real Estate
Canadian Apartment Properties operates in the multi-unit resident rental properties space, which includes apartments, townhouses, and manufactured home communities. It primarily operates in Canada, although has started to expand its portfolio internationally, such as in Ireland and The Netherlands. As of September 30, 2018, the Company’s mortgage portfolio carried a weighted average interest rate of 3.08%, up slightly from 3.00% during the same period in 2017. The Company’s debt to GBV (gross book value), a measure of leverage, was 40.5% at September 30, 2018, down from 44.8%, during the same period in 2017.
- Market Cap: $6.6 Billion
- FFO: $245.5 Million
- FFO Margin: 38.4%
- YTD Returns: +22.0%
Dream Office Real Estate Investment Trust (TSX:D.UN) – $23.26
Real Estate
Dream Office Real Estate Investment Trust is an unincorporated, open-ended real estate investment trust. The Company manages over seven million square feet of office space throughout Canada, with an emphasis on downtown Toronto and the GTA. In fact, nearly 70% of the Company’s portfolio consists of assets in Toronto. Over the past few years, Dream Office has executed on its strategic plan of selling non-core assets to reduce its leverage, with Q3 2018 debt to net assets at 46%. The Company holds $100 million in assets intended to be sold to further decrease leverage. Meanwhile, average net rent per square foot rose from $18.94 in Q4 2015 to $20.87 in Q3 2018. The downtown Toronto office market vacancy rate hit 3.1% in Q3 2018, allowing the Trust to continue to raise lease and rent payments as businesses compete for office space.
- Market Cap: $1.4 Billion
- FFO: $197.9 Million
- FFO Margin: 42.1%
- YTD Returns: +5.3%
Allied Properties REIT (TSX:AP.UN) – $45.45
Real Estate
Allied Properties manages and develops urban workplace projects in major cities across Canada and has achieved a 29% CAGR on its total assets since 2003. The Company’s office rental portfolio consists of 148 properties spanning 11 million square feet, with the majority of the office space clustered in Toronto and Montreal. Allied Properties generates 69% of its NOI through its office portfolio, and an additional 18% from its urban data centres. The Company’s revenue streams are diversified, with the Top 10 users of its urban data centres comprising only 19.4% of revenues. The Company’s debt to asset ratio was 27.6% according to the Company’s November 2018 investor presentation, strategically positioning Allied Properties amongst its peers.
- Market Cap: $4.7 Billion
- FFO: $187.2 Million
- FFO Margin: 44.7%
- YTD Returns: +8.4%
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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