Number Cruncher: Canadian REIT stocks outlook: Clouds on the horizon

What are we looking for?

Looking at all the stocks on the TSX, we want to screen for the highest ranking REITs. Rankings are determined by the INK Edge V.I.P. criteria (valuations, insider commitment and price momentum). This is the same approach we apply across the broad market to determine membership for the INK Canadian insider index, which is used by the Horizons Canadian Insider Index ETF (HII-TSX).

The screen

Our universe includes some 800 TSX-listed stocks that meet minimum size and liquidity requirements. To make the final grade in this screen, a REIT must trade over $3 and have a market cap of at least $250-million.

We begin by determining a stock’s rank in each V.I.P. category based on equally weighted factors.

Valuations (past 12 months except dividend yield)

– Price-to-earnings, price-to-book and price-to-sales ratios;

– Enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization);

– Price-to-cash flow or price-to-cash;

– Shareholder yield (buybacks plus dividends).

Insider (officer and director) commitment

– Recent net insider buying;

– Personal holdings (excludes shares held for other investors);

– Insider intensity, based on the number of insiders buying.

Price momentum

– based on three-, six- and 12-month returns.

Next, each V.I.P. category rank is equally weighted to determine a composite ranking.

In context

The percentile V.I.P. category and composite rankings are in relation to all other stocks in the market. Rankings are between 0 and 100, the higher the better.

A composite ranking over 90 goes into the top decile “sunny” outlook category. A composite ranking between 70 and 90 goes into the next two deciles, the “mostly sunny” category. INK sunny and mostly sunny outlook categories are designed to identify groups of stocks that have the potential to outperform the market. But keep in mind that even if a particular stock has a bright outlook, it could still rain on your portfolio’s parade. Diversification remains key.

What we found

No REITs made it into the sunny category and only six have a mostly sunny outlook. Indeed, with more than half of the REITs in our universe currently falling in the bottom 50 per cent of all ranked stocks in the market, insiders appear to be signalling that now is not the time to be allocating a lot of money into the area.

The declining appeal of REITs among insiders was evident in the semi-annual rebalancing of the INK Canadian insider index on May 15. Three REITs left the 50-stock index. The only one that remains is second-ranked Dream Global, which is focused on European commercial properties.

Contrarians, take note. The only residential REIT to make our list today is out-of-favour Northern Property REIT, which has a number of properties in resource-dependent provinces and territories.

Investors should conduct further research before buying any of the companies listed here.

Screen Run on May 20, 2015

This article was originally published in the Globe and Mail on May 28.

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