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Dependable REITs for yield-hungry investors

lmcleod@globeandmail.com

00:00 EDT Friday, April 11, 2008

WHAT ARE WE LOOKING FOR?

Lots of advice about investing in the stock markets is focused on the long term, but what about people who are retiring now and are desperately in search of steady, dependable income? With the fall from grace of income trusts, an alternative that still exists for yield-hungry investors: real estate investment trusts or REITs. Today we'll look for REITs with a dependable track record, and good prospects of maintaining solid dividend payments in the future.

THE SCREENS

We'll get some help today from Michael Smith, a real estate analyst at National Bank Financial Inc. He ran three separate screens to test REITs for strong yields and distribution reliability.

Mr. Smith first sorted the REITs by their adjusted funds from operations (AFFO) payout ratio. AFFO is a measure of performance used by REITs which tracks their cash flow, while also taking into account their recurring capital expenditures. Any trust with a payout ratio of less than 95 per cent of AFFO should have a sufficient cushion to continue to pay unitholders, maintain and upgrade its properties, and have something left over for growth, he said.

Second, Mr. Smith looked for REITs with a track record of increasing their payouts over time. REITs that made this cut had to have increased payouts by 3.5 per cent or more each year for the past three years, a level that beats the rate of inflation by a decent margin.

The last screen involved choosing real estate trusts with a current yield of 6.5 per cent or better. This level was chosen because it comes in comfortably above the highest-yielding of the Big Six banks, Bank of Montreal, which currently has a yield of 6 per cent, Mr. Smith said.

THE FINDINGS

After running these three tests, five large caps and one small cap made the cut. Shopping centre owners Calloway REIT, which owns properties anchored by Wal-Mart stores, and Primaris Retail REIT, which has malls across Canada, made the list. So did Northern Property REIT, which is a play on natural resources as it owns residential properties that often house workers in the Northwest Territories, Nunavut and Alberta. Quebec-based Cominar REIT is also on Mr. Smith's list. The firm is the largest commercial property owner in Quebec, with office, retail and industrial properties. Brick-and-beam office building owner Allied Properties REIT rounds out the list of larger REITs, while on the small-cap side, Royal Host REIT, which owns and manages Canadian hotels and resorts, also passed.

"These may not be the REITs whose unit prices will go up the most in the near term, but they are the best ones to invest in if you are retiring today and need income today," Mr. Smith said.

TickerPrice April 9*52-week low $52-week high $Yield %Yr.-to-date price ch'ge %1-year price ch'ge %AFFO payout ratio 2008 NB estimate %AFFO payout ratio 2009 NB estimate %Price to AFFO 2008 NB estimatePrice to AFFO 2009 NB estimate36-month CAGR in distribution %
Allied Properties REITAP.UN-T20.4517.0124.356.5-1.8-4.494.890.614.713.53.8
Calloway REITCWT.UN-T20.0518.528.297.7-16.5-26.391.290.611.6117.1
Cominar REITCUF.UN-T20.2317.0824.426.7-1.6-15.790.191.113.112.64.2
Northern Property REITNPR.UN-T21.1918.626.27-6.1-18.381.780.111.611.15.8
Primaris Retail REITPMZ.UN-T16.2514.98217.5-11.2-21.793.39312.411.94.1
Royal Host REITRYL.UN-T6.45.97.6510.3-1.2-11.6939098.522.4

SOURCES: NATIONAL BANK AND GLOBEINVESTOR.COM

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