REITs are companies primarily engaged in Real Estate and source most of their income from rents. To qualify as REITS (tax purposes) they need to distribute more than 90% of their net income to shareholders. This amongst other factors makes REITs a great option for income seekers looking for stable and decent dividends. At DSR we track 47 Canadian REITS! From that list, today we will be covering some of the higher-yielding companies (over 5% dividend yield). Although this might sound very appetizing make sure you do your due diligence because high yield is not always the same thing as high quality.

1. Make sure you find a healthy dividend growth rate in the last few years (at least 5 years). If the company is increasing dividends at a rate lower than inflation, it means every single year you are getting a smaller paycheck.
2. Some of these higher-yielding companies could also be dividend traps just looking to attract investors and their dividend is not sustainable, that is why you need to make sure you take a close look at the payout ratio (remember with REITs you use funds from operations (FFO) and not net income).
3. Last but not least take a look at their track history, have they cut dividends in economic downturns? If they have how fast did they recover? This could give you an idea of what to expect next time things get rough for these companies.

For more REIT investing guidelines, please refer to the Canadian REITs Beginner’s Guide.

BTB REIT (BTB.UN.TO)

Market Cap: $271M

Dividend Yield: 9.14%

Subsector: Diversified (Retail, Office, and Industrial)

BTB Real Estate Investment Trust (the Trust) is a Canada-based real estate investment trust (REIT). The objective of the REIT is to generate stable and growing cash distributions on a tax-efficient basis from investments in a diverse portfolio of income-producing properties, with a primary focus in Quebec; to expand the real estate asset base of the REIT and increase its income available for distribution through an accretive acquisition program, and to enhance the value of the REIT’s assets and maximize long-term Unit value through the active management of its assets. The Trust owns approximately 75 properties, representing a total leasable area of approximately 5.9 million (M) square feet. It is an owner of properties in eastern and western Canada. It also offers a distribution reinvestment plan to unitholders. The Company operates through three segments, namely Industrial, Off downtown core office, and Necessity-based retail.

In September, BTB REIT reported strong revenue growth (+11%), but failed to reflect this performance in its AFFO per unit (-7%). Revenue growth was driven by strong rental activity and recent accretive acquisitions. Furthermore, BTB’s net operating income increased by 13% and its leasing efforts improved the occupancy rate of the properties by 1.6% compared to the same quarter of 2021. AFFO per unit was down due to a one-time additional recovery of $2.6M and an indemnity collection thereby increasing the revenues for that period last year. The dividend is safe with an AFFO payout ratio of 65.5% for the quarter and 67.8% for the first six months of the year.

Slate Grocery REIT (SGR.UN.TO)

Market Cap: $783M

Dividend Yield: 9.20%

Subsector: Retail (Grocery)

It is known that we are not fans of brick-and-mortar REITs at DSR. However, Slate Grocery REIT focuses solely on grocery-anchored commercial properties, which are generally buffered against the competition from e-commerce. The REIT counts Walmart (6.2% of base rent) and Kroger (8.1%) as its top tenants. We also like SGR’s geographic diversification across Florida (15.5%), North Carolina (14.1%) and Pennsylvania (10.4%). This combination of strong tenants and good geographic diversification has led to a high rent collection rate in 2020. Slate Grocery boasts a defensive portfolio of tenants including 64% of its base rents linked to groceries (38%), essential services (14%), or medical and personal services (13%). Despite its strengths, this REIT still has a weak dividend growth policy.

In August, Slate Grocery REIT reported good growth this quarter (revenue up 18%, AFFO per unit up 5%). This brought the AFFO payout ratio from 100% last year to 98%. On July 15, 2022, the REIT completed the acquisition of 14 properties for $425 million, which represents a low acquisition basis of $174 per square foot with below-market rents. The Portfolio increases the REIT’s exposure to the rapidly growing Sunbelt Region of the U.S. and includes a wide range of high-performing grocers, including Publix, Ahold Delhaize, Albertsons, and Walmart Occupancy has increased by 20 basis points since the most recent quarter to 93.4%.

Smart REIT (SRU.UN.TO)

 Market Cap: $4.37B

Dividend Yield: 7.20%

Subsector: Diversified (Retail, Multifamily, Office, and Self-Storage)

SmartCentres’ strengths lie in its long-term partnerships with retail giants such as Walmart, Canadian Tire, TJX and Loblaws. We like how SRU has integrated drugstores and grocery stores into each mall. This ensures a constant flow of customers for all the other retailers. SRU doesn’t just count on its strong relationships with stellar tenants to ensure growth. Management has recently increased its focus on 5G towers, EV charging stations, and pickup services (to compete against e-commerce). SRU also has an “intensification plan,” where it will develop various property types (residential, hotels, office buildings, etc.) in fast-growing cities. SRU is in the midst of an ambitious expansion and diversification project where a total of $15B will be invested. This is a great way to ensure diversification away from large retailers going forward. SmartCentres’ intensification program is expected to produce an additional 58.6 million square feet of space.

In September, SmartCentres reported a good quarter with revenue up 2% and FFO up 6%. The payout ratio for the quarter is at 90%, down from 99% last year. If the REIT continues on this track, we could talk about a distribution increase next year. Shopping centre leasing activity continues to improve with occupancy levels, inclusive of committed deals, increasing to 97.6% in Q2 2022, representing a 40 basis points increase from Q1 2022. SRU received zoning approvals for over 3.8 million square feet of residential development in the second quarter on 3 projects in the Greater Toronto Area.

Truth about REITs

As you can tell, finding the perfect REITs for your portfolio is not an easy task. Especially when looking for high-yield REITs, there are a lot of factors that you need to consider in order to be able to sleep well at night. You want to add to your portfolio a stable business with enough growth to at least beat inflation. If you get down to the weeds, looking at the actual portfolio and its growth might be a good resource to look into the future. At DSR we give you the tools to make sure you put your money to work with stable and growing companies so you can enjoy your passive income on the things that matter most!

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

• How about REITs paying a 10% yield
• How to make sure the REIT’s distribution is safe
• Which metrics to consider during my analysis?
• Should I consider mortgage REITs?

Since REITs are a different type of corporate structure, they deserve to be addressed separately.  REITs are tax-advantaged investments. They pay no corporate tax, but in return, they must meet certain guidelines. They must invest primarily in real estate and must pay out most of their net income as dividends.

Canadian REITs can be good investments because they typically offer above-average dividend yields and can give an investor exposure to real estate without the typical difficulties of owning real estate directly (low liquidity, responsibility for maintenance, etc.).

Real Estate Income Trust Basics (REITS)

REITs are not only popular because they distribute generous dividends, but also because they are easy to understand. Investors can picture an apartment building or an office tower and see how tenants pay their rent monthly. They are willing to purchase units of those businesses in exchange for the income and peace of mind.

The concept of being a landlord and having tenants is comparatively simple to understand. The company owns and manages Real Estate in exchange for receiving rental income from properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels, and shopping malls.

Most REITs are equity REITs. They must invest most of their assets (75%) into real estate or cash equivalents. In other words, they cannot produce goods or provide services with their assets. This is how REITs must also receive 75% of their income from those real estate assets in the form of rent, interest on mortgages or sales of properties. REITs must also pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year. Therefore, the classic earnings per share and dividend payout ratios cannot be considered the sole gage of the health of an REIT.

There are several types of REITs:

Equity REITs

Equity REITs own and invest in property. They may own a diversified set of properties, and they generate income primarily in rent payments from leasing their properties.

Mortgage REITs

Mortgage REITs finance property. They generate income from interest on loans they make to finance property.

Hybrid REITs

Hybrid REITs do a bit of both, as they own property and finance property.

In general, REITs offer great investment opportunities by their nature. A growing economy leads to growing needs for properties. REITs can grow organically as the population requires more industrial facilities, healthcare centers, offices, and apartments.

Sub-Sector (Industry)

REIT – Diversified	REIT – Mortgage	REIT – Specialty
REIT – Healthcare Facilities	REIT – Office	Real Estate – Development
REIT – Hotel & Motel	REIT – Residential	Real Estate – Diversified
REIT – Industrial	REIT – Retail	Real Estate Services

REITs Greatest strengths

REITs are unique as they distribute most of their income. In fact, they exist to pay generous distributions. This makes them one of the retirees’ favorite sectors! Since these businesses must give most of their profits to shareholders, it is easy to understand how most of them offer a relatively high dividend income. This is one of the rare sectors where you can find “relatively safe” stocks paying 5%, 6% even 7%+. Investors must be careful not to get too greedy, though. We have seen several REITs cutting their dividends due to poor management or economic downturns.

REITs are not only popular because they distribute generous dividends, but also because they are easy to understand. Investors can picture an apartment building or an office tower and see how tenants pay their rent monthly. They are willing to purchase units of those businesses in exchange for income and peace of mind.

REITs usually bring stability in a portfolio along with higher yield. This is a great sector to start with when you are looking for additional income. Real Estate brings great diversification to your portfolio. Research has proved that REITs are not directly correlated to stock market movements over the longer term.

Finally, since most of them operate with escalator contracts, they offer great protection against inflation. Many Income trusts will include yearly rent increase in their rent to insure rental income matches inflation. Some REITs also operate under a Triple-Net business model. In this case, tenants take care of insurance, taxes, and maintenance costs, reducing the REITs expenses (and risk of unexpected charges!).

REITs Greatest weaknesses

One of the REIT sectors’ favorite ways to finance their new projects is to issue more units. Therefore, if a company purchases a property generating $20M per year but needs to issue more units to finance the purchase, you must look at the net outcome for unitholders. If the FFO per share drops, this is not necessarily good for you as it will affect the REIT’s ability to increase its dividend in the future.

Another downside related to their business model is their lack of flexibility. We have seen many times where REITs try to shift their focus from one industry to another. In most cases (H&R, RioCan, Boardwalk and Cominar to name a few), the change of trajectory comes with a dividend cut and a loss in value for unit holders. A REIT wishing to get rid of their shopping malls to buy more industrial properties will likely have to sell properties at a lower price and pay a hefty one to buy more appealing assets.

Finally, do not make the mistake of thinking REITs are safer than other sectors. Those are companies facing challenges while benefitting from tailwinds. While you may argue that an apartment building can’t go anywhere, I would answer back that if you have one hundred empty apartments due to an oversupply in a neighborhood, your money will also go nowhere.

How to get the best of REITs

While REITs are part of a short list of sectors that are perfect for retirees or other income seeking investors, it is important to understand that they cannot be analyzed using the same metrics as other sectors.

The Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) are probably the most useful tools to analyze a REIT’s financial performance. Those two metrics replace the earnings and adjusted earnings for a regular stock. While those are different metrics, it’s all about cash flow and the REITs ability to sustain their dividend payments. Fortunately for us, we can find those metrics inside each REIT’s quarterly report and subsequent press release. It is important to not only follow the FFO/AFFO in total but also to follow the FFO/AFFO per unit of ownership.

FFO = Earnings + Depreciation (Amortization) – Proceeds from Property Sales

AFFO = Earnings + Depreciation (Amortization) – Proceeds from Property Sales – Capital Expenditures

The use of the loan to value ratio (LTV) is a great tool to analyze the REIT’s future ability to raise low-cost capital. The LTV is easy to calculate from the financial statement, as you only need 2 measures of data:

LTV = Mortgage Amount / FMV of properties

You certainly don’t want to invest in a REIT showing a high LTV. This means that their credit rating may be at risk and the price for future debt will be higher. In other words, it could mean less money for future dividends.

The last metric you must follow that is specific for REITs is the Net Asset Value (NAV). The NAV (usually shown by units) can be translated to the equivalent of a Price to Book ratio.

NAV = Total Property Fair Market Value – Liabilities

The idea is to compare a few REITs from your list against one another. This is how you should be able to find the ones with the best metrics. A lower than industry NAV is either a riskier play or a value play. The AFFO and LTV will tell you which one it is.

The REIT sector is best for income investors.

Target sector weight: For income-seeking investors, you can aim at 15% to 30% (if you invest in various industries). For growth investors, REITs could represent a 5%-15% portion of your portfolio.

Do not use the payout ratio to determine the REIT’s dividend safety

Trusts have a special tax structure and they are required to distribute 90% of their taxable income. Therefore, using the payout ratio (which is based on earnings) will not be of help. The metric you are looking for is the Funds From Operations (FFO) and the Adjusted Funds From Operations (AFFO) payout ratios.

Funds from Operations Payout Ratio

Formula: DIVIDEND PER SHARE (DPS) / (ADJUSTED) FUNDS FROM OPERATIONS (FFO) PER SHARE

Utilization: Real Estate Income Trusts (REITs).

Since REITs are required to distribute at least 90% of their net earnings, the utilization of the adjusted funds from operations (AFFO or FFO) is a more precise metric. Like the payout and cash payout ratio, it’s preferable to look at a long-term trend.

Pros: Similar to the cash payout ratio, you get a clear picture of how much cash the company has to pay dividends.

Cons: In most cases, you can’t calculate the FFO payout ratio yourself or find it in general finance websites (therefore we try to mention it in our DSR Stock cards). You must rely on the company’s information found in their quarterly earnings reports. It requires additional time to establish a trend over several years.

REITs valuation

Valuing a REIT is like valuing any stock. Much like with MLPs, I generally utilize the Dividend Discount Model to value them, since most of their profits are paid as dividends.

There are, however, a few key metrics to know.

Net Asset Value is another estimate of intrinsic value. It is the estimated market value of the portfolio of properties, and it can be determined by using a capitalization rate on the current income that is fair for those types of properties. This can potentially understate the value of the properties because properties may appreciate rather than depreciate over time.  Compare the NAV to the price of the REIT.

The Funds from Operations (FFO) are far more important than net income for a REIT. Due to their tax structure, earnings mean almost nothing, and instead, it is all about the cash flow. To determine net income, depreciation is subtracted from revenues, but depreciation is a non-cash item and may not represent a true change in the value of the company’s assets.

So FFO adds back depreciation to net income to provide a better idea of what the cash income is for a REIT.

Adjusted Funds from Operation (AFFO) is arguably the most accurate form of income measurement of all regarding REITs since it takes FFO but then subtracts recurring capital expenditures on maintenance and improvements. It is a non-GAAP measure, but a very good measure for the actual profitability and the actual amount of cash flow that is available to pay out in dividends.

Overall, it is good to look for REITs that have diversified properties, strong FFO and AFFO, and a good history of consistent dividend growth.

REIT Advantages and Disadvantages

The advantages and disadvantages of REITs are like that of MLPs. They typically have high dividend yields, but their dividend growth rates are generally on the lower side.  They rely less on issuing new shares.

Advantages:

-REITs typically have above-average dividend yields.

-REITs serve as good protectors from inflation. If inflation occurs, property values and rents should increase over time, but fixed-interest debt that is used to finance the properties will not.

-Real Estate, if managed conservatively, can be a very reliable investment in terms of cash flow and in terms of dealing with recessions assuming rents are paid by the REIT’s tenants.

Disadvantages:

-REITs often have low dividend growth.

-REITs generally utilize debt to add to their property portfolio, but they typically make up for larger debt loads by using that debt for conservative, appreciating assets.

-Since REITs must pay out most of their income as dividends, they have little downside protection from recessions.  They may have to trim the dividend if their cash flow dips below their distribution levels. There are, however, some REITs that have developed good track records of consistent dividend growth.

Favorite Picks

Based on a mix of diversification, growth perspective, and dividend growth, we have identified three Canadian REITs that we like:

Granite (GRT.UN.TO)

GRT used to be an extension of Magna International (MG.TO). In 2011, Magna represented about 98% of its revenues. It is now down to 28% as at August 2022 (with Amazon as its second-largest tenant with 5% of revenue). Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 127 properties across 7 countries. Each time we review this stock card, the number of properties increases while the exposure to Magna Intl reduces. The REIT also boasts an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 77%), shareholders can enjoy a 3%+ yield that should grow and match or beat the inflation rate. This is among the rare REITs exhibiting AFFO per unit growth while issuing more units to finance growth. Granite is also part of the best monthly dividend REITs.

CT REIT (CRT.UN.TO)

An investment in CT REIT is primarily an investment in Canadian Tire’s real estate business. If you think this Canadian retail giant will do well in the future, but you are more interested in dividends than pure growth, CT REIT could be a good fit for you. Canadian Tire has exciting growth plans that will eventually lead to more triple-net leases for CT REIT. The fact that CRT pays a monthly dividend with a yield of approximately 5% is highly attractive to income-seeking investors. On top of that, CT REIT exhibits a decent dividend growth rate policy matching and beating inflation. This makes it a perfect candidate for an income-focused portfolio. Canadian Tire has done well during the pandemic thus far and has proven the resilience of its business model. It’s a sleep well at night REIT that should please all income-seeking investors.

InterRent (IIP.UN.TO)

IIP is what we describe as an “active REIT” where the company actively buys, improves, and recycles properties. This was a lucrative business model to manage in two growing provinces (Ontario and Quebec) over the past few years. InterRent seeks to acquire properties that have suffered from the absence of professional management. This is how they can buy at a lower value and relatively easily profit from their investment. Although IIP seems to exhibit a solid business model, we should keep in mind that things weren’t so successful over the 2008 financial crisis. The REIT has continued to demonstrate the resilience of its portfolio throughout the pandemic. With an occupancy rate hovering around 95% and the ability to increase rents by 5-6% per year on average, IIP is well-positioned to fight inflation in your portfolio. It hasn’t slowed down its appetite for growth and the REIT has managed to keep its dividend increase streak alive.

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

• How about REITs paying a 10% yield
• How to make sure the REIT’s distribution is safe
• Which metrics to consider during my analysis?
• Should I consider mortgage REITs?

 

 

Are you about to retire? You are probably looking to generate monthly revenue to support your retirement. In general, dividend-paying stocks will pay a quarterly dividend. However, some Canadian companies are paying monthly distributions. Since most of them are Real Estate Income Trusts (REITs), we created this list of all monthly distribution REITs.

What Makes REITs great monthly payers?

As most companies prefer to keep cash in their account and wait to pay shareholders at the end of the quarter, many Canadian REITs have opted for a monthly distribution structure.

Imagine that you purchase a rental property. Every month, you would receive payments from tenants, making up a perfect monthly revenue source, right? Well, REITs are structured the same way, except they own several properties with several tenants. Since they receive a monthly cash flow stream, they share the wealth and pass the money along to unitholders.

Monthly Distribution REITs List

At DividendStocksRock, we track over 1,000 dividend-paying stocks. Only 79 Canadian companies pay a monthly dividend from this list, and half of them (40) are REITs. Here is the complete list of all monthly distribution REITs.

Our Top 3 Monthly REITs

Some of the best Canadian REITs are paying a monthly distribution. Here are some of our favorites:

Granite REIT (GRT.UN.TO)

Market Cap: $4.4B

Dividend Yield: 4.50%

Sub-Sector: Industrial

GRT used to be an extension of Magna International (MG.TO). In 2011, Magna represented about 98% of its revenues. It is now down to 28% as at August 2022 (with Amazon as its second-largest tenant with 5% of revenue). Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 127 properties across 7 countries. Each time we review this stock card, the number of properties increases while the exposure to Magna Intl reduces. The REIT also boasts an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 77%), shareholders can enjoy a 3%+ yield that should grow and match or beat the inflation rate. This is among the rare REITs exhibiting AFFO per unit growth while issuing more units to finance growth.

Dividend Growth Perspective

GRT has maintained a solid dividend growth policy over the past 5 years (4%+ CAGR). With its FFO payout ratio well under control shareholders should expect a mid single-digit dividend growth rate going forward. The company even paid a special dividend in 2019. In fact, if the Magna International business is doing well, GRT will perform and keep increasing its dividend. We issued a buy rating on Granite a while ago. It’s still a buy, especially considering the latest price drop!

Killam Apartment REIT (KMP.UN.TO)

Market Cap: $1.75B

Dividend Yield: 4.50%

Sub-Sector: Residential

KMP’s current business model ensures a modest but steady cash flow trend, as rent increases by 1.8% per year, on average. We like the monthly distribution that follows inflation and protects income-seeking investors’ buying power. With many new projects in Ontario and Nova Scotia, KMP plans on providing shareholders with additional growth in the next few years. The apartment suites were mostly located in Nova Scotia (34%), Ontario (23%), New Brunswick (20%), and Alberta (8%). Geographic diversification aids KMP in achieving stable and reliable results quarter after quarter. KMP is the perfect example of a “boring is good” business.

Dividend Growth Perspective

Management is increasing its monthly distribution carefully and managed to bring its AFFO payout ratio back from 123% in 2013, to an acceptable level of 76% for the full year of 2021. The REIT has been able to improve its payouts due to strong same-property performance and continuous acquisitions. In the meantime, the distribution is tracking inflation with a roughly 2% growth rate over the past 5 years. The latest increase in 2021 was of 3%. Shareholders can expect to match inflation going forward as the REIT payout ratios are under control.

Canadian Net REIT (NET.UN.V)

Market Cap: $137M

Dividend Yield: 5.10%

Sub-Sector: Diversified

This is an interesting small REIT that has flown under the radar. Canadian Net REIT enjoys stable cash flows from its properties under the triple net lease formula (tenants handle insurance, taxes, and maintenance costs). Triple net lease REITs let tenants manage more risk as they handle all expenses involving the property. The REIT has high-quality tenants such as Loblaws (25% of NOI), Walmart (11%), Sobeys (10%), Suncor (7%) and Tim Hortons (6%). The REIT’s portfolio makes this company quite resilient to any kind of recession. We got a good idea of how NET fared during the 2020 lockdowns as its revenue continued to increase. The bulk of its properties are situated in the province of Quebec, with a small number in Ontario and the Maritimes.

We should keep in mind that the company trades on the TSX Venture. This small-cap (under $150M of market capitalization) is subject to low trading volume and strong price fluctuations. Follow this one quarterly to make sure the situation remains stable.

Dividend Growth Perspective

Don’t be alarmed by the dividend drop in 2018, as the REIT simply changed its payment schedule. In fact, this small-cap has been continually increasing its dividend since its IPO in 2011. Their FFO payout ratio is maintained between 55% and 65% as their FFO per unit grew just as quickly as its dividend in the past decade (in fact, it grew even faster). In other words, the dividend is safe and will continue to increase. NET increased its dividend by 12% in 2021, giving investors a glimpse of what to expect. Bear in mind that the distribution is a mix of dividend and return of capital, depending on the year. An investor should make sure to visit their investors’ websites before investing. This remains a small-cap stock subject to high fluctuations in price per share.

Those REITs are great, but there is more!

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

• How about REITs paying a 10% yield
• How to make sure the REIT’s distribution is safe
• Which metrics to consider during my analysis?
• Should I consider mortgage REITs?

 

Real Estate Income Trusts or REITs are known to be retirees’ best friends. Why? Because they share several key factors for income-seeking investors. Notably, Canadian REITs are known for the following:

• Their generous dividend yield (may offer a yield over 3%)
• Many pay their distribution monthly (fits well with your budget!)
• REITs operate stable businesses (recession-proof!)
• Their goal is to distribute as much money as possible (isn’t what you are looking for?)
• They are an excellent inflation hedge! (most of them have contracts with escalators clauses).

While REITs are great to generate income at retirement, they can’t be analyzed using the same metrics as dividend stocks. For example, REITs don’t pay dividends, they pay a distribution that could be a mix of dividend, return of capital, and income. Therefore, REITs distributions are not eligible for the tax credit! Don’t worry, if you invest in a registered account such as an RRSP or a TFSA, you are all good.

Before we jump to the Best Canadian REITs

Besides their distribution, there are other real estate income trusts’ characteristics that make them a unique investment type. Here are a few of them:

REITs valuation

Valuing a REIT is like valuing any stock. I generally utilize the Dividend Discount Model to value them, since most of their profits are paid as dividends.

There are, however, a few key metrics to know.

Net Asset Value is another estimate of intrinsic value. It is the estimated market value of the portfolio of properties, and it can be determined by using a capitalization rate on the current income that is fair for those types of properties. This can potentially understate the value of the properties because properties may appreciate rather than depreciate over time.  Compare the NAV to the price of the REIT.

Funds from Operations (FFO & AFFO)

The Funds from Operations (FFO) are far more important than net income for a REIT. To determine net income, depreciation is subtracted from revenues, but depreciation is a non-cash item and may not represent a true change in the value of the company’s assets.

So FFO adds back depreciation to net income to provide a better idea of what the cash income is for a REIT.

Adjusted Funds from Operation (AFFO) is arguably the most accurate form of income measurement of all regarding REITs since it takes FFO but then subtracts recurring capital expenditures on maintenance and improvements. It is a non-GAAP measure, but a very good measure for the actual profitability and the actual amount of cash flow that is available to pay out in dividends.

Overall, it is good to look for REITs that have diversified properties, strong FFO and AFFO, and a good history of consistent dividend growth.

Top 3 Largest Canadian REITs

One way to classify REITs is by market cap. Many investors will feel more comfortable in selecting a well-diversified business with a large property portfolio. Some REITs are present in many cities and provinces providing optimal geographic diversification. Here are the 3 largest Canadian REITs:

Canadian Apartment Properties REIT (CAR.UN.TO)

Market Cap: 8B

Dividend Yield: 3.15%

Sub-Sector: Residential

If an investor is looking for a steady source of income that will keep up with inflation, CAPREIT should be on their watchlist. In addition to enjoying a strong core business in Canada, CAPREIT is expanding its business in Ireland and the Netherlands. This gives them additional geographic diversification. CAPREIT continues to exhibit high-single-digit organic growth while raising additional funds to acquire more buildings. Unfortunately, the REIT neglected to increase its dividend in 2020. We cannot blame management for being overly cautious over the pandemic; they were fortunately stronger in 2021 and won back their dividend safety score of 3.

Dividend Growth Perspective

 

Over the past 5 years, management has been able to steadily increase its monthly distribution. The REIT continued its dividend growth tradition with a modest increase in 2019 (+3.6%). Management has proven its ability to grow its revenue both organically and through acquisitions. After taking a pause in 2020, CAPREIT came back with a generous dividend increase (+5.2%) from $0.115 per share to $0.121 per share earlier in 2021. The REIT won back its dividend safety score of 3 as it exhibits a strong FFO payout ratio of 62.6% for the full year of 2021. You can expect another dividend increase in 2022! The recent stock price drop brought the yield to about 3%; this looks like a good deal if you are prepared to be patient (e.g., expect more volatility throughout the rest of the year).

RioCan REIT (REI.UN.TO)

Market Cap: 6.40B

Dividend Yield: 4.87%

Sub-Sector: Retail

The REIT boasts an impressive occupancy rate. Over the past couple of years, REI sold non-core assets to concentrate on what they know best. We like management’s new focus, and we think it will help build additional value for investors into the future. RioCan can count on solid growth going forward, with 90% of its rents coming from the top 6 markets in Canada (with roughly 50% coming from the Greater Toronto Area). Unfortunately, the REIT must face constant headwinds coming from the retail brick & mortar industry. For this reason, RioCan is pursuing residential urban development projects (80%+ of its current pipeline). This could be an interesting growth direction, but we wonder: will it be enough to compensate for the brick & mortar retail industry’s slowdown? In the meantime, recent quarters tell that REI is growing FFO per unit, that’s a good start!

 

Dividend Growth Perspective

DAn investor shouldn’t expect much in terms of short-term dividend growth. When calculated using the DDM, we used a 3% dividend growth now that the REIT freed up some cash flow and increased its distribution by 6.25% in 2021. Let’s hope that their plans to expand into offices and apartment buildings will be profitable. The FFO payout ratio will be in line, but we expect RioCan to be more prudent with its cash flow going forward.

Allied Properties REIT (AP.UN.TO)

Market Cap: 4.13B

Dividend Yield: 5.39%

Sub-Sector: Office

Allied features one of the strongest balance sheets among Canadian REITs. It has much of its capital invested in low-cost projects and is now paying down higher interest debt at the same time as investing in new projects. AP maintains its unique expertise in managing and developing prime heritage locations, which will continue to be in high demand in the coming years. The REIT also counts on many technology clients which performed well during the pandemic. There are still concerns surrounding office REITs (AP generates ~70% of its income from offices), but this REIT has proven its resilience in difficult times. An investor will not be able to find many REITs that are able to systematically grow both their assets and distributions at the same time.

 

Dividend Growth Perspective

In evaluating a REIT, we hope that the dividend increase will at least match inflation. This is the case with AP. The company has posted a 2.7% dividend CAGR over the past 5 years and exhibits healthy FFO and AFFO growth. An investor can therefore expect 2-3% annual dividend growth going forward. As of May 2022, the REIT exhibits an AFFO payout ratio of 78% for the quarter. Allied increased its dividend by 3% in 2022, bringing its annual distribution payment to $1.75/share. This shows strong confidence from management and pleasant news for shareholders! Please note that Allied pays a monthly distribution.

Highest Yield REITs

If you are retired, your main concern may be how much income your portfolio can generate. In this case, you may be interested in finding out the most generous REITs. A word of caution, the following real estate income trusts haven’t increased their dividend in years. They are more at risk of cutting their distribution and your income is not protected by inflation.

True North Commercial REIT (TNT.UN.TO)

Market Cap: $558M

Dividend Yield:9.53%

Sub-Sector: Office

True North Commercial REIT is a Canada-based unincorporated, open-ended real estate investment trust. The Company owns approximately 49 commercial properties located in Alberta, British Columbia, Ontario, Novo Scotia and New Brunswick. The properties consist of office and industrial space, representing an aggregate of approximately 4.9 million square feet of gross leasable area. The Company is focused on growing its portfolio principally through acquisitions across Canada and such other jurisdictions where opportunities exist. All of the REIT’s properties are investment properties. Its properties include 3699 63 Avenue NE, 16th Avenue NW Calgary, Alberta, 855 8th Avenue SW Calgary, Alberta, 1020 68th Avenue Northeast Calgary Alberta, 810 Blanshard Street Victoria, British Columbia and 727 Fisgard Street Victoria, British Columbia.

In August of 2022, True North Commercial REIT reported an okay quarter as AFFO per share increased 14% (bringing the payout ratio from 106% to 96%), but reporting modest revenue growth of 3.6%. Q2 2022 AFFO basic and diluted payout ratio would be 112% and YTD 2022 AFFO basic and diluted payout ratio would be 111%. Be careful, it’s not the first time we mention the dividend is at risk.

Slate Office REIT (SOT.UN.TO)

Market Cap: $357M

Dividend Yield:8.94%

Sub-Sector: Office

 

Slate Office REIT (REIT) is a Canada-based unincorporated, open-ended real estate investment trust. The REIT is an owner and operator of office real estate. The REIT’s portfolio consists of approximately 32 real estate assets across Canada and includes two assets in downtown Chicago, Illinois. The REIT’s 61% portfolio is comprised of government or credit rated tenants. The REIT operates in Canada and the United States.

Inovalis REIT (INO.UN.TO)

Market Cap: $165M

Dividend Yield:8.14%

Sub-Sector: Office

Inovalis Real Estate Investment Trust (the REIT) is a Canada-based open-ended real estate investment trust. The REIT is formed for the purpose of acquiring and owning office properties primarily located in France and Germany and also in other European countries. It owns interest in office properties in France and Germany comprising approximately 1,450,000 square feet of gross leasable area. Its properties in France are located in the Greater Paris Region and the Inner Rim and remaining properties are located in Germany. Its France properties include Courbevoie, Sabliere, Baldi, Arcueil, Metropolitan, and Delizy. Its Germany properties include Duisburg, Trio, Bad Homburg, Stuttgart, Neu-Isenburg, and Kosching. The REIT is managed by Inovalis S.A.

Unfortunately, Inovalis recently cut its distribution! We have warned our DSR members for a potential dividend cut in May of 2022 and management announced the dividend cut in August of 2022. Since the share price plummeted, Inovalis is still among the highest yielding REITs, but not for a good reason…

 

My Favorite Picks

Finding the perfect REITs isn’t easy. As a dividend growth investor, I’m looking for a combination of a stable business with some growth perspective. I like when management can grow their property portfolio through investments and acquisitions while increasing distributions enough to beat inflation. I found this perfect balance among three Canadian companies:

CT Real Estate Investment Trust (CRT.UN.TO)

Market Cap: $3.88B

Dividend Yield: 5.16%

Sub-Sector: Retail

An investment in CT REIT is primarily an investment in Canadian Tire’s real estate business. If you think this Canadian retail giant will do well in the future, but you are more interested in dividends than pure growth, CT REIT could be a good fit for you. Canadian Tire has exciting growth plans that will eventually lead to more triple-net leases for CT REIT. The fact that CRT pays a monthly dividend with a yield of approximately 5% is highly attractive to income-seeking investors. On top of that, CT REIT exhibits a decent dividend growth rate policy matching and beating inflation. This makes it a perfect candidate for an income-focused portfolio. Canadian Tire has done well during the pandemic thus far and has proven the resilience of its business model. It’s a sleep well at night REIT that should please all income seeking investors.

Dividend Growth Perspective

This REIT continues to grow and maintain a low AFFO payout ratio of 75% (May 2022) which is in line with previous quarters. This means your distribution will likely continue to rise faster than the inflation rate going forward. Shareholders can expect to cash a solid 5% yield with a ~3% growth rate. This is a perfect example of a sleep-well-at-night type of holding. After a small increase in 2020 (+1.5%), CT REIT came back strong with increases of 4.5% and 3.3% in 2021 and 2022, respectively. Keep in mind many retail REITs cut their dividend over the pandemic. CT REIT has proven that an investor can trust the company as part of their retirement plan.

Canadian Net REIT (NET.UN.V)

Market Cap: $138M

Dividend Yield: 5.03%

Sub-Sector: Diversified

This is an interesting small REIT that has flown under the radar. Canadian Net REIT enjoys stable cash flows from its properties under the triple net lease formula (tenants handle insurance, taxes, and maintenance costs). Triple net lease REITs let tenants manage more risk as they handle all expenses involving the property. The REIT has high quality tenants such as Loblaws (25% of NOI), Walmart (11%), Sobeys (10%), Suncor (7%) and Tim Hortons (6%). The REIT’s portfolio makes this company quite resilient to any kind of recession. We got a good idea of how NET fared during the 2020 lockdowns as its revenue continued to increase. The bulk of its properties are situated in the province of Quebec, with a small number in Ontario and the Maritimes. We should keep in mind that the company trades on the TSX. This small cap (around $150M of market capitalization) is subject to low trading volume and strong price fluctuations. Follow this one quarterly to make sure the situation remains stable.

Dividend Growth Perspective

Don’t be alarmed by the dividend drop in 2018, as the REIT simply changed its payment schedule. In fact, this small cap has been continually increasing its dividend since its IPO in 2011. Their FFO payout ratio is maintained between 55% and 65% as their FFO per unit grew just as quickly as its dividend in the past decade (in fact, it grew even faster). In other words, the dividend is safe and will continue to increase. NET increased its dividend by 12% in 2021, giving investors a glimpse of what to expect. Bear in mind that the distribution is a mix of dividend and return of capital, depending on the year. An investor should make sure to visit their investors’ website before investing. This remains a small cap stock subject to high fluctuations in price per share.

Granite REIT (GRT.UN.TO)(GRP.U)

Market Cap: $5.01B

Dividend Yield: 3.97%

Sub-Sector: Industrial

GRT used to be an extension of Magna International (MG.TO). In 2011, Magna represented about 98% of its revenues. It is now down to 31% as at November 2021 (with Amazon as its second-largest tenant with 5% of revenue). Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 114 properties across 7 countries. The REIT also boasts an investment grade rating of BBB/BAA2 stable. With a low FFO payout ratio (around 72%), shareholders can enjoy a 3%+ yield that should grow and match or beat the inflation rate. This is among the rare REITs exhibiting AFFO per unit growth while issuing more units to finance growth.

Dividend Growth Perspective

GRT has maintained a solid dividend growth policy over the past 5 years (4%+ CAGR). With its FFO payout ratio well under control, shareholders should expect a mid single-digit dividend growth rate going forward. The company even paid a special dividend in 2019. In fact, if the Magna International business is doing well, GRT will perform accordingly and continue increasing its dividend. We issued a buy rating on Granite some time ago. It’s still a buy, but the quick win has already been made on this security.

Learn how to invest in REITs

We are now in market correction territory, and the fear of losing more money is growing. What will happen if we keep up with continuous high inflation?

If you look at past performances, Real Estate Income Trust is one of the best performing classes during high inflation periods since the 70s. Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

In this webinar, I will answer questions like:

• How about REITs paying a 10% yield
• How to make sure the REIT’s distribution is safe
• Which metrics to consider during my analysis?
• Should I consider mortgage REITs?