Real estate investment trusts (REITs) borrow money to make money. This sector tends to have high financial leverage, which is a concern if leverage is too high or when lending rates rise. If you’ve been following this sector, you will notice that many TSX REITs have had an October price bump-up. Of the 19 REITs on the TSX with market capitalization above $1 billion, I used the following criteria to arrive at a top 10 list:
1. Are current revenues growing or shrinking?
2. Is the debt-to-equity ratio low or high?
3. How high is the dividend yield?
4. Is the price-to-cash flow ratio low or high?
I ranked all 19 REITs according to each of these considerations. Like a game of golf, the REIT with the lowest score across each of these equally weighted criteria would be the top-ranking REIT. Of course, there are several other important financial metrics to consider, but this quick screen gives you a sense for companies that are producing revenue, sharing profits with shareholders through the dividend, and low on financial leverage. These are all good things, right?
Here is the REIT top-10 list in reverse order:
10. Riocan Real Estate Investment Trust (TSX:REI.UN) is the largest REIT in Canada, primarily focused on retail and much discussed.
9. Northview Apartment Real Estate Investment Trust (TSX:NVU.UN) is rebounding after lower earnings per share, but its debt-to-equity is among the highest.
8. Allied Properties Real Estate Investment Trust (TSX:AP.UN) is up 20% over 52 weeks — a great run for this REIT, which has maintained a lower debt over the last two years.
7. Canadian Real Estate Investment Trust (TSX:REF.UN) has a great track record of 16 consecutive years with a dividend increase. This company seems to be diversifying by adding industrial warehouses to its portfolio of 205 properties, which are predominantly retail.
6. Crombie Real Estate Investment Trust (TSX:CRR.UN) had a flat revenue quarter, but it seems to be fairly valued and pays a 6.7% dividend.
5. H&R Real Estate Investment Trust (TSX:HR.UN) is the second-largest TSX REIT, and I’ve written favourably about this company previously.
4. Dream Global Real Estate Investment Trust (TSX:DRG.UN) trades on the TSX, but holds property in Canada and Europe in almost equal portions. It has the second-highest dividend at 7.2%.
3. Artis Real Estate Investment Trust (TSX:AX.UN) currently pays the highest dividend at 7.8%, and this appears to be something the company can maintain. A few years ago, this company had a high debt-to-equity ratio, and that has been shrinking consistently with each quarter. This helps to explain the 21% stock price gain in one year.
2. It came as a surprise that NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) was ranked number two. This REIT saw revenue increase this quarter by 14% compared to the same quarter in 2016. The low valuation is attractive, but this company also has the highest debt-to-equity ratio on this list.
1. And the number one REIT was Pure Industrial Real Estate Trust (TSX:AAR.UN). I have been watching this stock run up; this company is doing well with a strong rapport with its industrial tenants, where vacancies are very low. The dividend yield is 4.7%, which is low on this list, but this growth stock is not your conventional REIT. Revenue increased 22% this quarter, which was the largest by a fair margin.