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:
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%
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%
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%
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
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
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
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%
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%
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%
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?