Quick REITs Analysis Guidelines


For this final part, I wanted to give you a methodology to quickly analyse REITs. If you have missed the rest of this series, you can read more about REITs investing here:

REITs Guide Part I

REITs Guide Part II

REITs Guide Part III

I know that you don’t have all the time in the world and that one of the reasons you purchased this book was to save time. After reading the past few articles on REITs, you may be ready to drop this option and concentrate on dividend stock picking. REITs analysis will require you to look deeper into financial statements since most information you need cannot be taken from the stock screener of financial websites. This is why I’m summarizing those guidelines to give you a clear and quick idea of what you should be looking for:

  • FFO & AFFO under 100% – you are looking for viability
  • Dividend Yield over 3% – you are looking to get paid
  • 5 Years Dividend Growth positive – you are looking to get paid more
  • LVT under 65% – a lot of equity means more leverage options and cheap debt
  • Geographic diversification: 55% of revenue or less by province + preferably a small exposure to USA market (it will bounce back one day or another).
  • Tenant diversification: less than 5% of revenue by tenants + sector diversification

The Best Way to Get your Information

You can usually use a general stock filter to start your research. By selecting “REITs” as sector in the search criteria and adding dividend yield as other criteria. Unfortunately, Google Finance doesn’t have a “REITs” sector. However, if you use Finviz, you can select the type of REITs in the “industry” sub-sector (REITs are generally part of the financial industry). A simple filter research with Finviz would show you that there are 43 REITs with a diversified approach and having a 3%+ dividend yield. If you want to cut down the research fast, I’d suggest you use Mid Cap+ (2 billions and over) criteria. This would give you only 19 REITs to screen. Then, you can do the same process for all types of REITs you are interested in (healthcare, hotel/motel, industrial, residential, office and retail).

Source: screenshot from Finviz.com

Once you have a found a few interesting REITs, you can then now go to their website and search for their investor presentation and quarterly/annual reports. Those documents will give you the AFFO, FFO, NAV and LTV figures you are looking for without calculating. Most REITs investor presentations also include easy-to-understand graphs telling you more information about their geographic and business diversification. Another metric often followed in those documents is the occupation rate telling you if the REIT uses their building to their full potential.

Diversification is Darn Important

A solid REIT is one that will go through a recession without suffering much harm. In order to do so, it requires solid tenants, a high occupancy rate, and great diversification.

When we talk about diversification for REITs, we talk about:

  • Different type of tenants (commercial, office, etc);
  • Different locations (city sizes, provinces).

When looking at the type of tenants, a REIT should look at different economic sectors. This will avoid major downfall if a specific sector is hit by the economy. Retails and grocery stores will always be winning tenants in my opinion, as big franchises are less likely to close all at the same time.

Most REITs will tend to concentrate in a single province to build their core business. This makes sense as they will gain a great expertise in managing according to the province’s economy and tax structure. However, since the Canadian economy is well diversified from one coast to the other, it is a great addition to look at more than one province when expanding. For example, as of Q3 2011 financial statement RioCan has 54% of its revenue coming from Ontario (this is their core business). However, they also receive 14.9% from Quebec, 11.3% from Alberta, 5.6% from BC and 10.7% from USA. This represents a great mix between concentrations in a specific market in order to become a leader in a niche while protecting their assets by having about 50% of their revenue coming from other places

Financial Translation from Stocks to REITs

Still confused about what to track for a stock and what to track for a REIT? Here’s a quick “translation chart” that will help you figure out what you should be looking for when searching for a REITs, considering you have a background in investing in stocks.

Stocks REITs
Earnings Earnings (Rent + Proceeds from sale)
Price to Book Ratio NAV
Dividend Payout Ratio FFO & AFFO
Debt to Equity Ratio Loan to Value Ratio
Dividend Growth Same! Yeah!
Growth Potential Increase from rent, management abilities, future projects
Gross Margin Occupancy Rate

The Ideal Proportion in my Portfolio is…

While building a dividend growth portfolio, I think that adding Canadian REITs is a very good idea. I would never consider them as safe as bonds (because they are not!), but they can certainly play a similar role in a more aggressive portfolio.

If you are looking to build at 100% stock portfolio, the addition of REITs will be a great tool to reduce the volatility of your portfolio while boosting its distribution yield. You don’t have to leave too much money on the table. Since REITs are showing an investment return between that of bonds and the stocks, you will pay a decent price for stability.

As a ball park figure, let’s just say that in general, anything from 0% (for more aggressive portfolios) to 30% (retirement oriented portfolios) would be a great mix in your asset allocation. I know it’s tempting to put 50% or more of your holdings into REITs an reap a solid 6-7% yield… but go read Part II of this series if you are tempted to do so!

You Want to Cut Through the Chase and Get the Top 10 REITs?

You have enjoyed this series, but you rather have someone else do the hard work and research? I get it. Therefore we did it for you!

The first Dividend Stocks Rock newsletter of June will include this series + the TOP 10 REITs (5 U.S. and 5 Canadian). We have reviewed this sector with one question in mind:

Which is the Best REITs for dividend growth investor?


If you want the answer to this question, register to Dividend Stocks Rock through this special offer link and get your Top 10 REITs report.


I hope you enjoyed this series and that now REITs are easier to understand!

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