What are we looking for?
History suggests that the U.S. real estate sector performs better than its Canadian counterpart in a rising interest-rate environment because of the shorter term nature of U.S. lease obligations. Generally speaking, this allows U.S. companies to pass on the increased costs associated with rising rates at a quicker pace. This prompted my associate Allan Meyer and I to take a closer look at the sector using our investment philosophy focused on safety and value.
The screen
We started with companies in the S&P 500 real estate sector with a market capitalization of $10-billion (U.S.) or more, sorted from largest to smallest. Market cap is a safety factor: Larger companies tend to be more liquid and stable.
Allan and I – and, more importantly, our clients – love to get paid while we wait for capital appreciation, and dividends generally reflect safety and stability. Yield is based on the projected annualized dividend a share divided by the share price.
When analyzing real estate investments, adjusted funds from operations (AFFO) is a key metric and often considered a better predictor than measures based on earnings or cash flow. It takes into account capital expenditures used to maintain the underlying real estate. The payout ratio is the dividend divided by the AFFO. A lower number implies safety of the dividend and may foreshadow a future dividend bump. Vice versa for a payout that's more than 100.
Debt to equity is a leverage ratio and safety measure. A lower number is better. As we like to tell clients, it's hard to go bankrupt without having any debts.
Price/AFFO is the current share price divided by the AFFO. It is a valuation metric: The lower the number, the better the value.
We then looked at the occupancy rate or the percentage of rented spaces compared with available space. A higher number is preferred.
Lastly, we've included the data's average and median numbers for easy comparison.
What did we find?
Ventas Inc., GGP Inc., Mid-America Apartment Communities Inc. and Regency Centers Corp. look attractive on most measures. The comparatively high debt levels on Simon Property Group Inc. should be noted.
Exchange-traded funds are an option for investors who like the sector but prefer to diversify away individual security risk. Two examples are iShares U.S. Real Estate ETF and Vanguard REIT Index Fund.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.