With increasing household debt, climbing house prices, and last year’s interest rate rises, it’s no wonder that real estate is such a hot topic in Canada at the moment. Indeed, with a surfeit of economic pressures facing the domestic market for 2019, some pundits are starting to wonder how the real estate industry might cope with a potential recession.
Let’s take a look at three of the biggest REITs currently trading on the TSX index and see which might be best placed to weather a hardening real estate market or whether they’re too much of a liability.
Morguard Real Estate Investment Trust (TSX: MRT.UN)
This popular choice is competitively valued and returns a decent dividend yield. However, a one-year past earnings growth of -14.1% signals that the last 12 months haven’t been great for Morguard REIT. Worse than that, though, is a five-year earnings average of -31.5%, which shows that the last half decade hasn’t been great, either.
What’s good about this stock is a pair of attractive multiples (see a P/E of 12.7 times earnings matched with a good P/B ratio of 0.5 times book), a chunky yield of 7.87%, and an expected 14% annual growth in earnings. What’s not so good is a high debt level of 83.9% of net worth. Can better REIT stats be found on the TSX index? Let’s find out.
Artis Real Estate Investment Trust (TSX: AX.UN)
Off to a good start already, Artis REIT’s one-year past earnings growth of 40% beats the average Canadian REITs’ year-on-year growth of 24.6%, and smashes its own 0.7% five-year average. However, with an even higher debt level than the previous stock’s, up at 94.9% of net worth, we’re back to square one.
A considerable amount of inside buying over the last three months shows that insider confidence is high, and is always a good indicator of how well an asset is expected to perform among those with a little extra insight. Perhaps that decent valuation signified by a low P/E of 8.4 times earnings and matching P/B of 0.7 times book looked good. Then again, it could have been that sizeable dividend yield of 5.31% or cheery outlook: Artis REIT is looking at a 12.4% expected increase in earnings.
Agellan Commercial Real Estate Investment Trust (TSX:ACR.UN)
This sturdy REIT also had a good year: a one-year past earnings growth of 21% just missed the Canadian REIT average for the same period of 24.6%, though overall its five-year average past earnings growth was higher at 38.1%. With a lower debt level than its competitors at 55.8% of net worth, Agellan Commercial REIT looks like a frontrunner.
Valuation looks good for this REIT, too, with a low P/E of 6.4 times earnings; however, a P/B ratio of 1.1 times book is very slightly over the per-asset asking price. That said, its share price is discounted by 39% compared to its future cash flow value, so value really is a flash word for Agellan Commercial REIT.
The bottom line
In summary, there’s a certain amount of risk in holding a stock with high debt attached, especially in such an uncertain economic environment. Investors looking for the best deal for a domestic REIT trading on the TSX index should weigh up a couple of things when it comes to frontrunner, Agellan Commercial REIT, however. On the one hand, it carries less debt than its competitors listed above, and pays a decent dividend yield of 5.69%. On the other, it’s looking at an expected -3% in earnings over the next one to three years, thereby undermining its appeal.
