McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Newsletter – October 2020

October 2020 – Outlook for the REIT Sector

While the Reit sector only makes up 3.2% and 2.6% of the TSX and S&P 500 indices respectively, the distribution yield of over 6% makes it an attractive income generator. However as of the end of September, the year to date total return for domestic Reits was a dismal minus 23.3%.

Based on this sharp underperformance relative to the overall equity market, I thought it was an opportune time to revisit this sector to determine if an increase in exposure is warranted at this time. As you know my model portfolios have been underweight this sector for quite some time after it was clear that the negative effects of this pandemic would lead to an economic slowdown. While is it obvious that a new spike in daily cases will slow any current economic rebound, another total lockdown is unlikely. There will be pockets of the economy where lockdowns are implemented but these are specifically targeted and are not likely to result in a total economic lockdown.

Net asset value is considered the best overall industry valuation metric, over other measures like price / book values. The calculation takes the market values of any Reit’s holdings and deducts its debts. Another useful industry statistic is the cap rate which is the overall yield on a property. The cap rate is the inverse of a P/E multiple. Lastly the market value of a building is the operating income of that property divided by the cap rate for comparable buildings.

After the recent share price decline of the Reit sector, most companies are currently trading on the stock market at a discount to their net asset values. This means that private properties that are not trading on the stock market, have market values that are materially higher than comparable properties owned by Reits and thus at lower cap rates. All of this implies that the Reit sector offers good value at current levels and is at historically attractive levels relative to private properties.

After the Ontario government recently announced a planned apartment rent freeze for 2021, the domestic benchmark equity sector Reit initially fell by up to 4% on this news. However, this announcement is only applicable to Ontario and does not take into account that rents can continue to be adjusted resulting from lease turnovers.


I continue to prefer apartment and industrial Reits and remain cautious on retirement homes, shopping malls and commercial office buildings. Retail Reits such as CRT that have its major tenant being Canadian Tire, are also in good shape. As Summit Reit is a relatively smaller industrial Reit and not well followed, it is difficult to obtain its net asset value. However, the company’s fundamentals remain solid and its recent rent collections are exceeding 96%. Canadian Apartment, InterRent, Dream Industrial and CRT Reits are all trading at discounts to their net asset values. Granite Reit trades at a 11% premium but this is warranted given its strong balance sheet, positive growth metrics and the stability of its major tenant, Magna.

I am recommending a switch out of InterRent into Minto Reit. Minto trades at a much larger discount to net asset value and has a lower AFFO distribution payout at 61% compared to InterRent’s 74%. In addition, Minto’s rent occupancy rate has only gone down by 84 basis points between the 4th quarter of last year and the second quarter of this year. On the other hand, InterRent’s occupancy rate has declined by almost 300 basis points over the same period.

While the US reit sector has performed better than the Canadian year to date, valuations are more attractive domestically.

In terms of equity sectors, I am upgrading the Reit sector from underweight to market weight.

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