The group’s projected earnings growth is higher than projections for the S&P 500 Index, yet REIT earnings are far less volatile than the average S&P 500 company. In addition, at 15 times FFO, PE equivalent metric, REITs have a lower P/FFO ratio than the S&P 500 (16.3x) while their dividend yield is higher (4.2% vs. 2.0%). REIT dividend yields also compared favorably with the 10-year Treasury bond’s 4.0% yield at the end of 2007. In an uncertain environment, investors could find these metrics appealing.
A comparative analysis between US and Canadian REITs, reveal that Canadian Reits are that much more undervalued than their US counterparts. The average Canadian Reit P/FFO is 12.4 times compared with 15 for the average US REIT. In addition, Canadian REITs are sporting 6.2% dividend yield compared to 4.2% for a US REIT.
The average Canadian REIT has a less of a risk profile that their US counterpart as well. Canadian REITs rely on less leverage as their long term debt to Enterprise value stand at 44%, while the US REIT stands at 48%. Also, the Canadian economic environment is much more favorable than that in the US, as the Canadian employment and consumer spending trends are much more positive than the US. Reits as a sector offer value if you pick the right ones. Canadian REITs offer much more value than US ones due to lower risk profile and cheaper valuation.
I have assembled certain metric for comparative between the two groups:
|US Reit||CDN Reit|
|P/FFO||12.4 x||15 x|
|Entp Value/ FFO||29x||22.9x|
|LTD/ Entp Value||48%||44%|
|LTD/ Mcap||1.04 x||86%|
I have already bought RioCan and I am looking at two other Canadian real estate securities that promise some value. I have listed all my watch list of potential value idea here.