REITs

High-Risk High-Reward Stock for June 2024: Allied Properties REIT (AP.UN.TO)

On my buy list since April 2023, Allied Properties REIT (AP.UN.TO) has moved to the top on that list for Canadian stock paying a yield of 4% or more. Allied Properties is still not getting a lot of love from the market due to the negative sentiment around the real estate sector, and even worse for office properties. We continue to believe that AP is a very interesting play. Its stock price decline makes it a good entry point for investors interested in a speculative real estate stock. This is a falling knife—high risk, high reward—so proceed with caution.

Create and manage your own dividend income portfolio. Learn how in our Dividend Income for Life Guide.

Allied Properties Business Model

Allied Properties is a Canada-based open-end real estate investment trust (REIT). It owns and operates unique urban workspaces in Canada’s cities and network-dense urban data centers in Toronto.

It provides knowledge-based organizations with distinctive urban environments for creativity and connectivity. Allied Properties operates in seven urban markets in Canada: Montreal, Ottawa, Toronto, Kitchener, Calgary, Edmonton, and Vancouver.

Allied engages in third-party property management business, providing services for properties, in which a trustee of Allied Properties has an ownership interest.

AP.UN.TO Investment Thesis

AP.UN.TO 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 represent a growing sector in Canada.

There are still concerns surrounding office REITs, but Allied Properties has proven its resilience in difficult times. The 2023 distribution increase (+2.7% in early 2023) and low payout ratio for a REIT were good signs.

AP remains a high-risk, high-reward play; investors must do their due diligence and monitor the occupancy rate and FFO per unit growth.

AP.UN.TO Last Quarter and Recent Activities

Allied Properties did well in its most recent quarter, all things considered, with revenue up 4%, and Adjusted Funds from Operations (AFFO) per unit up 1%. The AFFO payout ratio for the quarter stands at 83.8%. Same Asset NOI (net operating income) from Allied Properties’ rental portfolio was down 2% while Same Asset NOI from its total portfolio was up 2.9%, reflecting the productivity of its upgrade and development portfolio.

AP.UN.TO’s occupied and leased area at the end of the quarter was 85.9% and 87%, respectively. This was lower than the previous quarter. We wish we would see this number go above 90%. Allied Properties remains a speculative play. Below is Allied Properties’ dividend triangle showing the falling stock price but revenue going back up. As always with REITs, look to FFO or AFFO per unit rather than EPS.

Potential Risks for AP.UN.TO

Most of Allied Properties’ income is derived from office properties. We know how the pandemic left a dent in the real estate market, especially for office space. Some workers were eager to return to the office, while others weren’t willing to. Many enjoy working from home and the way we work may be forever changed. There will be demand for quality office buildings, but how we will use offices in the coming years remains uncertain, and parking revenues might be weaker going forward.

AP.UN.TO’s properties are mostly located in Ontario (Toronto) and Quebec (Montreal). This limited geographic diversification can leave it vulnerable to economic changes in these provinces. We saw in their latest quarterly update that both regions had been affected. Fortunately, smaller markets such as Calgary and Vancouver showed strong occupancy rates. The global occupancy rate is at 87% for Q1 2024. We advise to not to enter a position unless you are willing to take the risk.

Create your own money-making machine. Learn how in our Dividend Income for Life Guide.

Allied Properties Dividend Growth Perspective

When evaluating a REIT, we look for dividend increases that at least match inflation. This is the case with AP.UN.TO. The company has a 2.5% dividend CAGR over the past 5 years and healthy FFO and AFFO growth. An investor can therefore expect 2-3% annual dividend growth going forward.

For the full year 2022, AP.UN.TO’s AFFO payout ratio was 81%. It increased its distribution by 2.7% in 2023 (after a 3% increase in 2022), for an annual distribution payment of $1.80/share. After paying its special distribution in December 2023, AP.UN.TO hasn’t increased its distribution increase yet in 2024 but still shows a healthy AFFO payout ratio of 80%. If AP.UN.TO’s distribution doesn’t increase by the end of 2024, it will lose its dividend safety score of 3 at Dividend Stocks Rock . Allied Properties pays a monthly distribution.

Final Thoughts on Allied Properties REIT

With still much uncertainty around office space use in the future and Applies Properties’ occupancy rate on a downtrend (87% in Q1 2024 vs. 87.3% in Q4 2023 vs 89.5% in 2022), this is a speculative play.

However, AP.UN.TO still has decent payout FFO and AFFO payout ratios (77.8% and 83.8% respectively), making its guidance sustainable. It boasts unique heritage properties in urban areas and clients in the growing technology sector. It also has a strategic objective to establish its urban rental-residential portfolio.

With its stock price at under $17, compared to $21 a year ago and $32 two years ago, and distribution increases matching inflation (though not yet in 2024), this falling knife could be an interesting real estate play. Again, potential high reward, but high risk!

Canadian REITs Beginner’s Guide

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

Real Estate Income Trusts (REITs) have a unique type of corporate structure which makes theme tax-advantaged investments. They pay no corporate tax, but in return, they must meet certain criteria: they must invest primarily in real estate and pay out most of their net income as dividends.

REIT Basics

REITs are not only popular because they distribute generous dividends, but also because they’re easy to understand. Investors can picture an apartment building or an office tower and tenants paying their rent monthly. Investors 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 and receives 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 (properties) or cash equivalents. In other words, they cannot produce goods or provide services with their assets. They must generate 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 their taxable income as dividends to shareholders each year. Therefore, the classic earnings per share (EPS) and dividend payout ratios don’t gauge the health of an REIT.

Learn about other sectors and how to build a recession-proof portfolio. Download our free workbook now!

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, or mREITs for short, 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 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’s 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 usually bring stability in a portfolio along with higher yield. It’s a great sector to start with if you’re 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 include yearly rent increases in their leases to ensure rental income matches inflation. Some REITs also use Triple-Net leases, where the tenants is responsible for insurance, taxes, and maintenance costs, thus reducing the REITs’ expenses (and risk of unexpected charges!).

Learn the strengths and weaknesses of other sectors and how to build a recession-proof portfolio. Download our free workbook now!

REITs 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, don’t make the mistake of thinking REITs are safer than other sectors. They are companies facing challenges while benefiting 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.

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.

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.

Funds From Operations (FFO/AFFO)

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, we can find those metrics inside each REIT’s quarterly report and subsequent press release. It’s important to follow not only the total FFO/AFFO, but also the FFO/AFFO per share (or unit of ownership) rather than earning per share (EPS) or adjusted earnings per share.

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

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

Loan to Value Ratio (LTV)

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.

Net Asset Value (NAV)

The last metric to follow 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.

Don’t use the payout ratio to assess REITs’ 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) doesn’t help. The metrics you’re 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

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

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. Since REITs distribute most of their profits as dividends, I generally use the Dividend Discount Model (DDM) to value them. However, some of other REIT-specific metrics we’ve seen are also vary valuable when valuing REITs.

Net Asset Value (NAV) is another estimate of intrinsic value. It’s the estimated market value of the portfolio of properties. One way to evaluate this value is to divide the current net income from the properties by a capitalization rate that’s fair for those types of properties. NAV can potentially understate the value of the properties because it might not capture value appreciation of properties during strong growth periods in the market. Compare the NAV to the price of the REIT.

We’ve seen that Funds from Operations (FFO) are far more important than net income for a REIT. Due to the tax structure of REITs, earnings mean almost nothing; instead, it’s all about cash flow. When calculating net income, depreciation is subtracted from revenues; depreciation is a non-cash item and might not represent a true change in the value of the company’s assets. FFO adds depreciation back to net income, providing a better idea of the cash income for a REIT.

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

Overall, it’s 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

Before presenting some of our picks for Canadian REITs, let’s sum up the advantages and disadvantages of REITs.

Advantages:

Usually have above-average dividend yields.
Are good protectors from inflation. If inflation occurs, property values and rents increase over time, but fixed-interest on the debt that finance the properties doesn’t.
Real estate, if managed conservatively, can be a reliable investment for income and in times of recession, assuming tenants pay their rent.

Disadvantages:

Often have lower dividend growth than companies in other sectors.
Generally use debt to add to their property portfolio, but their larger debt loads is used for conservative, appreciating assets.
Since they have to pay most of their income as dividends, they have little downside protection from recessions. They might have to trim the dividend if their cash flow dips below their distribution levels. There are, however, some REITs that have good track records of consistent dividend growth, despite market downturns.

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 25% as of November 2023 (with Amazon as its second-largest tenant with 4% of revenue). You’ll notice that each year, GRT reduces its exposure by a few percentage points. Management has transformed this industrial REIT into a well-diversified business without adversely affecting shareholders. GRT now manages 138 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 70-75%), shareholders can enjoy a 5% 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.

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 6% yield is highly attractive to income-seeking investors. On top of that, CT REIT exhibits a decent dividend growth rate policy, matching and beating inflation over the long haul. In the past 10 years, the company grew its revenue and AFFO by mid-single digits numbers. This makes it a perfect candidate for an income-focused portfolio. Canadian Tire has done well in the past 5 years 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.

Canadian Apartment Properties (CAR.UN.TO)

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.

Those REITs are great, but there’s more!

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 be sure to buy the right ones.

Watch this webinar during which I 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?

Watch the free Webinar replay here

Best Monthly REITs 2024

Are you about to retire? Are you looking to generate monthly revenue? Generally, dividends are paid quarterly. However, some Canadian companies pay monthly distributions. Most of them are Real Estate Income Trusts (REITs); here is our selection of the best monthly REITs for 2024. We also include the list of all REITs paying a monthly distribution.

Download the list of Canadian companies, in all sectors (not just REITs), that pay monthly dividends!

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 1,200 dividend-paying stocks. Only 72 Canadian companies pay a monthly dividend from this list, and over half of them (39) 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: $5B
Dividend Yield: 4.41%
Sub-Sector: Industrial

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 AFFO payout ratio was under 73% for Q3 2023 (reported in November 2023). You can expect more distribution increases going forward! The company even paid a special dividend in 2019. If the Magna International business is doing well, GRT will perform and keep increasing its dividend. The REIT offered a conservative distribution increase in November of 2023 with a raise of 3.125%. We issued a buy rating on Granite a while ago. The stock price has bounced back to a point, but we still see this as a buy.

CT REIT (CRT.UN.TO)

Market Cap: $2B
Dividend Yield: 6.15%
Sub-Sector: Retail

Dividend Growth Perspective

This REIT continues to grow and maintain a low AFFO payout ratio of 75% for full year 2022. The AFFO payout ratio for the first nine months of 2023 is at 73.2% (slightly below 2022 numbers). This means your distribution will likely continue to increase faster than the inflation rate going forward. Shareholders can expect to cash in a solid 6% 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 that many retail REITs cut their dividend over the pandemic. CT REIT has proven that an investor can trust the company to be part of their retirement plan. CT REIT rewarded investors with another 3.5% distribution increase in 2023. Even with a conservative DDM calculation (expected dividend growth of 3%), the REIT offers an attractive entry point at a price below $15.

Canadian Apartment Properties REIT (CAR.UN.TO)

Market Cap: $8B
Dividend Yield: 3.06%
Sub-Sector: Residential

Dividend Growth Perspective

Over the past 5 years, management has been able to steadily increase its monthly distribution. After taking a break in 2020, CAPREIT returned with a generous dividend increase (+5.2%) from $0.115 per share to $0.121 per share earlier in 2021. Unfortunately, there wasn’t a dividend increase in 2023 (but rather a special dividend). Since CAPREIT generated capital gains through the sales of properties in 2023, the REIT issued a non-cash special dividend of $0.49 per unit. We will wait in 2024 to see if there will be a distribution increase but we may have to revise the REIT’s dividend safety. In the meantime, the REIT exhibits a strong FFO payout ratio of 60.5% for the first 9 months of 2023. Management has proven its ability to grow its revenues both organically and through acquisitions. The recent stock price drop brought the yield around 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).

Download the list of Canadian companies, in all sectors (not just REITs), that pay monthly dividends!

Those REITs are great, but there’s more!

In this webinar, I 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?

Watch the free Webinar replay here

High Yield Canadian REITs

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.

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.
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).
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?

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?

Watch the free Webinar replay here

Best Canadian REITs with a Safe Dividend

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).

Before we jump to the Best Canadian REITs

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’re all good.

Besides their distribution, there are other characteristics that make REITs a unique investment type. Here are a few of them.

REITs valuation

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

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

Net Asset Value (NAV) is another estimate of intrinsic value. It’s 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. Since depreciation is a non-cash item, it might not represent a true change in the value of the company’s assets. FFO calculation 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.

So rather than look to Earning per Share (EPS), which is calculated using net income, for REITs, look for the FFO per unit or AFFO per unit.

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 feel more comfortable 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 three largest Canadian REITs:

Canadian Apartment Properties REIT (CAR.UN.TO)

Market Cap: 8B
Dividend Yield: 3.06%
Sub-Sector: Residential

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: 5.5B
Dividend Yield: 5.9%
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, REI increased its FFO per unit by 7% for the full year of 2022 and it has several projects in its pipeline. We see continuity in FFO per unit growth in 2023. The REIT exhibits a strong balance sheet and a low payout ratio.

Dividend Growth Perspective

An investor shouldn’t expect much in terms of short-term dividend growth. When calculated using the DDM, we used a 3% dividend growth rate 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. As expected, the REIT offered a dividend increase in 2023 (+5.88% from $0.085/share to $0.09/share).

Granite REIT (GRT.UN.TO)

Market Cap: 4.8B
Dividend Yield: 4.41%
Sub-Sector: Industrial

Dividend Growth Perspective

We issued a buy rating on Granite a while ago. Even with the stock price bouncing back a bit, it’s still a buy.

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, a very high yield isn’t necessarily a sign that all is great, always make you due diligence when researching REITs to choose the best and safest. More information about that later in this post.

Allied Properties REIT (AP.UN.TO)

Market Cap: $2B
Dividend Yield:10.29%
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 currently 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 represent a growing sector in Canada. 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. The 2023 distribution increase (+2.7% in early 2023) and low payout ratio for a REIT are good signs. AP will sell its data centers to bank highly valued assets in order to purchase more undervalued ones (office properties). This could be a very strong move. However, AP remains a high-risk, high-reward play, but please proceed with caution.

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 2.5% 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. For the full year of 2022, the REIT exhibits an AFFO payout ratio of 81%. Allied increased its distribution by 2.7% in 2023 (after a 3% increase in 2022), bringing its annual distribution payment to $1.80/share. This demonstrates strong confidence from management and pleasant news for shareholders! However, it doesn’t mean it’s a smart move…

Canadian Net REIT (NET.UN.V)

Market Cap: $102.7M
Dividend Yield:6.87%
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. 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 (approximately $100M of market capitalization) is subject to low trading volume and strong price fluctuations. Monitor this one quarterly to make sure the situation remains stable. Always proceed with caution with small caps.

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. The FFO payout ratio hovers 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). Unfortunately, while management claims the distribution is safe with a payout ratio of 62%, it didn’t announce an increase. Following the small increase of 2023 (+3.6%) and no increase for 2024, the REIT is likely going to lose its dividend safety score of 3 if it doesn’t increase its distribution later in 2024. Revenue increased through higher rental income, but higher interest charges affected the FFO. Proceed with caution with this small cap.

CT REIT (CRT.UN.TO)

Market Cap: 2BM
Dividend Yield:6.25%
Sub-Sector: Retail

Dividend Growth Perspective

My Favorites

Finding the perfect REITs isn’t easy. As a dividend growth investor, I look 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 these three Canadian companies, which happen to be either among the largest or the highest-yield REITs we covered earlier in this post:

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

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

Canadian Apartment Properties REIT (CAR.UN.TO)

Learn how to invest in REITs

Unfortunately, not all REITs are created equal and you must do adequate research to make sure you buy the right ones.

Watch this webinar, in which I 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?

Watch the free Webinar replay here