Monday, March 28, 2016

Canadian REITS With Growing Distributions

Although I have much respect for real estate investors who achieve financial independence by growing their income through acquiring rental properties, this is not a path that tempts me in the least. My wife is far more handy around the house than I am, and the thought of taking calls from tenants in the middle of the night sounds like a nightmare. However, I have no issues collecting distributions from a variety of real estate investment trusts ("REITs") in my portfolio. After investing in a diversified portfolio of properties, the only work I have to do is figure out how much income from REIT distributions to declare in various categories at tax time.

Although I am very happy with my two US REITs, Realty Income and Omega Healthcare Investors, who regularly reward me with distribution increases, I am less content with my Canadian REITs, Riocan and H&R REIT. Both Riocan and H&R last increased their distributions in January 2013 by    2.2% and 8.0% respectively. Even though both of my Canadian REITs have reported solid results over the past 3 years, and remain the largest REITs on the TSX by market capitalization, neither has seen it necessary to raise their distributions. This sad fact, along with a growing amount of cash in my portfolio (~8% as of today), has lead me to consider adding a REIT in either my TFSA or RRSP.

The screen below lists nine REITs traded on the TSX who grew their distribution in the last twelve months. I only included REITs with market capitalizations in excess of CAD $1 billion and that generated positive funds from operations (FFO). I ranked the REITs by their distribution yield added to their 1-year distribution growth rate. I also included a Market Capitalization divided by FFO calculation to get an idea of how much the market was charging for the funds the REIT generated from operations.

Of the nine companies listed, Granite REIT jumps out at me for its highest growth plus yield, and the relatively cheap price/FFO. The company has a solid balance sheet as evidenced by their Baa2/Stable rating from Moody’s. Magna International Inc. (Baa1/Positive) is the biggest tenant accounting for 79% of rental revenue (down from 81% at YE14). Even though Magna is a strong tenant, Granite is clearly subject to the cyclicality of the auto making industry through their primary tenant. Vacancy at Granite’s 95 rental properties (~30 million square feet) was 1.1% at YE15. Comparable FFO grew 2.9% for the year as the result of acquisitions of properties and increases in rents. Revenues grew 4% in FY15 vs FY14. Granite concluded a strategic review at the start of March 2016 that saw the company consider a variety of options including transformational acquisitions, paying a special distribution, the sale of properties and the sale of the entire business. A private equity buyer was interested but did not pursue the acquisition due to higher credit costs in the market. I see the review itself and the fact a private equity investor was interested as major positives. The review shows me that management is open to any action that maximizes shareholder value, while the interested private equity investor demonstrates that the strong cashflow generation of Granite is being noticed by potential buyers.

A couple of the other names on the list interest me (Smart REIT & CT REIT) so I will complete more due diligence on those companies. In the meantime, I will be adding Granite to my watch list for April. With the current yield and history of distribution growth, it would be a nice fit in my TFSA or RRSP.

Are there any Canadian REITs that you would consider buying at their current prices?


  1. REITS are looking very attractive at the moment. In the UK market, there are a couple of REITs that are tempting me to purchase and I just might pull the trigger one of these days!

    1. I'd be curious to hear what REITs in the UK you have your eye on at the moment. The universe of REITs in Canada is very limited.

      Thanks for stopping by and commenting.

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