We have a fantastic announcement today with the long-awaited launch of our REIT screener.
However, there is no doubt that many members will be wanting us to speak on the current market correction.
There isn’t much more to be said that hasn’t already been mentioned by us…
Buy strong companies, and hold them for the long term.
Buying strong companies and holding them for the long term has been the recipe for success in the markets for over 100 years now.
If you started after the COVID-19 market crash, this is the first real turbulence you have faced in your investing career, despite a short correction in early 2021.
It is human nature to think you need to “do something”. Whether it be to panic and sell your holdings, or to try and time the bottom by selling now and buying in at a lower price. Ultimately, there will be two results of these actions:
The first, you’ll get lucky and the markets will continue to fall further, allowing you to buy in cheaper.
The second? The markets will begin to recover, and you’ll then have the exact same feeling again of needing to “do something” to make sure you don’t miss the markets on the way back up.
You’re either going to be wrong, or you’re going to be lucky. And I don’t know about you, but I don’t like to rely on luck when it comes to my investments.
It has been proven time and time again over 100+ years of market data that the best strategy is to simply do nothing.
Has the growth portion of Premium taken a hit in short-term returns? Absolutely it has. However, looking back to highlighted stocks in 2018 and 2019, 71% of them are outperforming the TSX Index, even in the midst of this nasty correction.
Although many investors, members included, will no doubt sell out during this correction fearing the markets just aren’t for them, those who have a properly structured portfolio and an attitude for long-term success (and not short-term profits) will ultimately succeed. Just as those in the past have, Mat and I included.
Speaking on a diverse portfolio, let’s get to a tool that could help you add some excellent real estate investment trusts
This has been a long time coming. Over a year in the making, we are excited to launch the Real Estate Investment Trust (REIT) screener, which you can view here. Please be sure you read all of this e-mail, as it contains some especially valuable information.
This screener can be used on mobile, but it is much more user friendly on a desktop/laptop. If you’re having issues with the data not displaying correctly, please shoot us an e-mail. We can tidy up display and data bugs quickly if we are notified!
Much like the Growth and Dividend screeners, the REIT screener is a powerful tool that subscribers can use to help narrow down their REIT investments options. Before we jump into the screener itself, let’s talk about why a REIT screener is necessary.
REITs are a very particular type of investment vehicle
While they were serviceable within the context of our Growth and Dividend screeners, fitting them into the mold of traditional stocks never made sense.
For example, since earnings per share and price to earnings are not all that relevant to the industry, ranking them according to growth and valuation in this area doesn’t make sense. Our growth screener takes into account earnings, forward earnings, P/E to growth (PEG), and analysts’ earnings estimates – all of which don’t really fit with REITs.
The same goes for our dividend screener. Comparing a REIT’s dividend, which is not really a dividend but a distribution, against earnings or other traditional dividend metrics, also isn’t all that relevant.
While both of these screeners were serviceable for REITs and there was decent information to be had, they never really fit these two screeners.
That is why it was imperative that we create and launch a REIT screener. The problem, however, was quickly evident. REITs don’t use traditional stock metrics and much of the information available from data providers also didn’t make sense.
We thought we had a solution with Ycharts and while it was better than the other data providers we had, there were still issues with FFO (Funds From Operations) and NAV (Net Asset Value) – two fundamental and key metrics in the REIT industry.
With that in mind, we had to build a hybrid screener. One that involved both data from Ycharts and data from the quarterly reports themselves. No matter how hard we tried, there was simply no way for us to accurately capture some of the data we wanted as part of our screener without manually going into each quarterly report.
The good news is that we now have a process and a REIT screener that is unlike anything available on the market today
The REIT Screener ranks stocks by considering the distribution, financial stability, potential growth, and valuation. It is an all-encompassing screener.
Distribution
Much like our dividend screener, the distribution considers yield, distribution growth, and distribution safety. While many of these are self-explanatory, we wanted to break down the safety of the distribution further.
Our primary point to determine safety is through the FFO Payout Ratio. As alluded to, this was one of the hardest metrics to come by. Since it is a non-GAAP metric, it is calculated slightly differently from company to company. It also means that data providers FFO metrics vary quite significantly from the results posted in company earnings reports.
Therefore, we decided that it was best to take that FFO data directly from the quarterly reports. This ensures that there is no confusion and that the FFO payout ratio is in line with what the company is releasing to the public.
We had considered adding AFFO (Adjusted Funds From Operations), another popular metric, but surprisingly not all REITs release this number, and it is even more subjective than FFO. Through our research, we realized that for those that reported on it, AFFO didn’t vary all that significantly from FFO in most cases. Given this, we left it off the screener.
For the most part, these data points can be compared across the entire sector and are not industry specific.
Financial stability
REITs are some of the most capital-intensive businesses on the TSX Index. That means that a strong financial profile is critical to ensuring success. The screener considers metrics such as debt-to-assets (D/A), debt-to-equity (D/E), debt-to-ebitda (D/EBITDA), and FFO/Interest.
Once again, FFO plays a key part in assessing the financial strength of the company. One can argue that it is also relevant to the safety of the distribution. As mentioned, these are high CAPEX (capital expenditure) companies that carry significant debt loads. A strong FFO/Interest ratio means that the company has no problems covering the interest on said debt.
According to the REIT institute, D/A is one of the most important leverage ratios for REITs. Simply put, this debt ratio is the portion of REIT assets financed by debt.
In these cases, you’ll notice that ratios vary wildly from industry to industry. That means they are likely best compared against industry peers. That being said, research from the REIT institute has shown that the ideal debt ratio (D/A) for REITs is 62.5% and that a D/E ratio of 90% is average. A caveat to this research and data, it is based on US REITs which are much different than Canadian REITs.
While these are good barometers, we do suggest comparing their performance against industry averages.
Potential Growth
One of the issues with the growth screener is that it takes analysts earnings estimates into account. Since EPS is mostly irrelevant to REITs, there are usually no estimates in this area. If there are, they are usually wildly inaccurate or in some cases mean FFO growth, but are expressed as EPS.
Since we cannot distinguish them, we are sticking to analyzing top-line growth (revenue). This is the only current factor used in determining the company’s growth profile within the context of the screener.
We are currently looking at how we can incorporate FFO growth and is likely an update to the screener that will come later.
Valuation
Finally, we have also taken valuation into account within our screener. Once again, FFO plays a key role here as Price to FFO (P/FFO) is largely considered one of the more reliable valuation metrics in the sector.
Secondly, the company’s current market price in relation to net asset value is arguably the most relevant. One mistake investors make is they use P/B ratio to value a REIT. While there are similarities, P/B and NAV are not one and the same.
NAV is another non-GAAP data point and one that is not available via data providers. Around half of the REITs publish their NAV on a quarterly basis, while the other half do not. This means we had to take the data available to us to manually calculate NAV for the remaining.
Based on our research, it appears to be a best practice among Canadian REITs to calculate NAV as Shareholder Equity – Preferred Shares. Therefore, we based our calculations on this formula to capture NAV for the rest as it ensured an apples-to-apples comparison.
Circling back to P/FFO, while sector-wide comparison is fine, we do suggest drilling down by industry. In terms of NAV, all one has to do is look and see if the company is trading at a premium or discount to NAV, which we have readily available in the screener.
A word of caution here – just because a REIT is trading at a premium to NAV does not make it a bad buy. Likewise, just because a company looks cheap in terms of a discount to its NAV, doesn’t mean it’s a good buy. Context is everything and this is where additional due diligence comes in.
Perhaps there are macro factors playing into current valuations. Likewise, a company may be trading at a premium because it has higher growth potential and is in better financial shape. Bottom line – don’t look at a single data point for decision-making.
We hope you take full advantage of this screener. We have been using it for our own purposes over the past couple of months as we tested it out and we used much of the information contained within the screener as we made the conclusion to keep Granite REIT (GRT.UN) as our Foundational stock instead of a company like Dream Industrial (DIR.UN), even though the decision was very close.
An important reminder that REITs are ranked based on an algorithm, and one must not buy blindly. Always conduct further due diligence. We use the screeners as a starting point, a way to quickly highlight potential investment candidates, or to eliminate possibilities.
As always, feel free to jump on the Q&A or go to our REIT channel in Discord to ask any questions or for further clarification on the screener.
Again, you can view the REIT screener here. For future reference, it will be available on the top menu under: Other Premium Content -> Screeners. On mobile: simply in the main menu.
