A few readers have asked me why we don’t invest in rental properties and invest in real estate investment trusts (REITs) instead. There are a few reasons why we prefer investing in Canadian REITs rather than rental properties.
First, Mrs. T and I already have our hands full on a daily basis, we don’t want to have to worry and take care of all the potential pitfalls of rental properties like frozen pipes, broken toilets, or leaky roofs. Sure, we can use a property manager to deal with all that but that comes at a cost.
We’ve heard quite a few bad encounters from our friends who have had to deal with problem tenants. It seems that the BC rental laws are more favourable to tenants. Having to deal with potential bad tenants is a major headache that we don’t want to deal with. Lastly, the high property values in BC, and in Canada for that matter, makes the one percent rule difficult to achieve.
So after evaluating all the potential upturns and downturns of rental properties, Mrs. T and I decided that it is best for us to invest in real estate through REITs. Please note, this is our personal decision but for some, rental properties may make sense, especially if you’re very handy and love to do handy DIY projects.
Even if you do own rental properties, investing in REITs is a great way to diversify your real estate portfolio and gain exposure to different types of properties that you may not be able to own otherwise. Best of all, investing in REITs typically means higher dividend yields than regular dividend paying stocks, resulting in slightly higher dividend income each month.
What are some best Canadian REITs? Are the largest REITs always the best picks?
What is a real estate investment trust?
Before I dive deeper, let’s find out exactly what a real estate investment trust, or REIT is.
A REIT is a company that owns, manages, operates, or finances income-generating real estate properties. Like mutual funds, REITs pool capital from investors and use that capital to purchase or acquire properties under company ownership.
REITs typically have higher dividend yields than regular dividend paying stocks. Due to the business structure of REITs, anywhere from 80 to 95% of the income after expenses are passed directly to shareholders without being taxed at the corporate level.
This means dividends from REITs are typically considered as ineligible dividends and thus are not eligible for the Dividend Tax Credit. In fact, distributions received in a non-registered account are usually counted as a combination of normal income and capital gains, and taxes can be applied accordingly.
Therefore, to directly address one of the earlier questions above, if you do invest in REITs, it is best to hold them in tax-advantaged accounts like TFSA or RRSP.
List of all Canadian REITs
As you can imagine, there are many REITs available on the Canadian market. Usually, when people think of REITs, the first thing that comes to mind is retail REITs or companies that manage and operate shopping malls and retail spaces. But there are other REIT segments over and above the retail segment. In fact, there are seven different REIT segments:
Note, senior residential REITs typically fall under the Healthcare segment.
Some companies can own a mix of segments, for example, office, retail, residential, and healthcare properties, making them diversified REITs.
Below is a list of 38 different Canadian REITs I could find. Note, I used the list from REIT report as my starting point, and then used data from the Canadian Dividend All Star list, Morningstar and Google Finance.
|5 Yr DGR %
|American Hotel Income Properties
|Canadian NET REIT
|Canadian Tire REIT
|Canadian Apartment REIT
|Chartwell Retirement Residences
|Choice Properties REIT
|Dream Industrial REIT
|Dream Office REIT
|European Residential REIT
|Firm Capital Property Trust
|First Capital REIT
|Morguard North American Residential
|NorthWest Healthcare Properties
|Plaza Retail REIT
|Slate Grocery REIT
|Slate Office REIT
|Summit Industrial Income REIT
|True North Commercial REIT
I think dividend investors should not use yield as the key indicator for determining whether to invest in a stock or not, especially when it comes to REITs. It is important to invest in REITs with larger market caps since that usually means a larger portfolio holding, more real estate assets under management, and normally results in better overall asset diversification.
From a segment point of view, the 38 REITs are broken down as below:
- 3 Industrial REITs
- 2 Healthcare REITs
- 1 Hotel REITs
- 3 Office REITs
- 6 Retail REITs
- 8 Residential REITs
- 15 Diversified REITs
Interestingly enough, 42% of the REITs are diversified, meaning the companies own and manage properties in different segments. This, however, shouldn’t come as a surprise since holding properties in the different segments typically means the company is less susceptible to changes in a specific segment. Investing in a specific REIT segment can mean potentially more volatility.
For example, many workers, including myself, have been working from home for the last two years, so many offices are sitting at near empty capacity. As a result, the office REIT segment has not been doing too well since the start of the global pandemic.
Interestingly, we own both Granite REIT and Dream Industrial REIT, or two out of the three Canadian REITs in the industrial segment. Industrial REITs own and manage logistics, warehouse and industrial properties. Many of these properties are in high demand due to the popularity of online shopping. In fact, many financial experts suggest that the online shopping phenomenon, already a major economic force, will grow going forward. Therefore, I remain bullish on the industrial REIT segment.
What valuation metrics to use for REITs?
Because of the way REITs are structured, we cannot just evaluate REITs by looking at the standard financial valuation metrics like net income, PE ratio, and payout ratio.
The best way to assess REITs is to use metrics like:
- Funds from operations (FFO)
- Adjusted funds from operations (AFFO)
- Price to FFO ratio
- FFO payout ratio
Think of FFO like a REIT’s earnings. This is by far the most important number for REITs. As an investor, you want to see a growing FFO over time.
AFFO is like adjusted earnings. This allows REITs to offset any one-time expenses and provide a true picture of how much money the REIT is making. In other words, you can consider AFFO as free cash flow.
The price to FFO ratio is essentially like the PE ratio. It gives you an idea of how expensive the REIT is relative to other REITs. In the same way that you should not compare PE ratios between different economic sectors (i.e. Canadian Banks vs. high tech), it is best to compare the price to FFO ratio of REITs in the same segment.
FFO payout ratio gives investors an idea of what percentage of the REIT’s income after expenses are paid out in distributions. Each REIT typically sets an FFO payout ratio range target. Monitoring the FFO payout ratio can give investors an idea of whether or not the distributions are safe.
Remember, REITs typically distribute 80 to 95% of their income after expenses to shareholders. So if the FFO payout ratio is below 80%, there’s a good chance the REIT will increase the payout. If the FFO payout ratio is close or above 95%, there’s a good chance a cut may be coming.
Please note, it may not be possible to find these valuation metrics on sites like Google Finance, Yahoo Finance, or Morningstar. However, REITs will disclose these metrics in their quarterly and annual reports. In other words, one must search quarterly and annual reports and learn how to read them.
Other factors to consider
In addition to the valuation metrics mentioned, investors also need to consider other factors when it comes to picking out the best Canadian REITs.
For example, since REITs generate income by collecting rents from tenants, occupancy rate and rent collection rate are both important factors to examine. I certainly wouldn’t want to invest in a REIT that has an above 5% yield but has both occupancy rate and rent collect rate in the 80% range.
It is also important to go through the financial reports and understand the key tenants and tenant base. Generally speaking, you want to invest in REITs with a diverse tenant base or one with strong ‘anchor tenants.”
For example, you want to have some big name tenants that wouldn’t close down a store after a short period of time. These big name tenants typically bring high foot traffic to the area, which is beneficial for other retail stores. Big retail names like Home Depot, Walmart, Superstore, and Costco, can all be considered as anchor tenants.
I also like to go through a REIT’s portfolio and see if there are properties near me that I know of. I then use my “be an owner approach” to evaluate the REIT. Take RioCan for example, I have been to three RioCan managed retail locations in Metro Vancouver and all three retail locations. I have observed that all three locations have high shopper traffic and all the stores are occupied with some major retail names like Home Depot, SportsChek, Indigo, and Mark’s.
Best Canadian REITs for 2024
Below are my pick for the 5 best Canadian REITs based on the metrics and factors outlined above. Please note, I’m not a professional financial advisor so take these as suggestions. Always do your own research before buying and selling any stocks.
1. Allied Properties REIT (AP.UN)
The office REIT segment has had a lot of challenges throughout the global pandemic. However, I believe Allied Properties is well positioned for a strong comeback.
Allied Properties, unlike many Canadian office REITs, did not cut its distribution over the last two years. Instead, the company increased its dividend payout by 3.1%. This is largely due to having office properties in key Canadian cities. Allied Properties has 195 rental properties valued at $8.4B with 14.2M square feet of gross leasable area. In addition, it has 11 properties under development valued at $1.2B.
As you can see from below, all of AP.UN’s properties are located in major Canadian cities with the majority of the properties located in Toronto and Montreal.
- Sector: Office REIT
- Dividend Yield: 3.83%
- FFO Dividend Payout Ratio: 70.6%
- 5 Year Dividend Growth Rate: 2.5%
- Dividend Increase Streak: 10 years
What I particularly like about Allied Properties is the occupancy rate is higher than the market occupancy rate (with the exception of Vancouver). I also like that the top 10 tenants are all well known companies. Best of all, no tenant makes up more than 4.5% of the rental revenue.
Although how we work has changed due to the pandemic, companies will continue to need office spaces. Many meetings are simply more efficient and effective when done face to face. This was probably one of the many reasons why Bruce Flatt, the highly respected CEO of Brookfield Asset Management, argued strongly that the pre-pandemic office environment will return.
By having properties in urban centres and continuing to develop and update these properties, I believe Allied Properties will continue to grow in the future.
2. Granite REIT (GRT.UN)
Granite REIT is a Canadian-based real estate investment trust engaged in the acquisition, development, ownership management of logistics, warehouse and industrial properties in North America and Europe.
- Sector: Industrial REIT
- Dividend Yield: 3.08%
- FFO payout ratio: 76%
- 5 Year Dividend Growth Rate: 4.4%
- Dividend Increase Streak: 11 years
GRT.UN’s portfolio consists of 118 investment properties representing almost 51.3 million square feet of leasable area with an occupancy rate of 99.6%. These numbers are very impressive for a REIT. I have come to really like Granite REIT for its global footprint as well as its focus on institutional-quality assets in key distribution and e-commerce markets.
As you can see from below, Granite REIT has grown by $5B in value in the last ten years. With the popularity of online shopping and online retailers like Amazon and Wayfair needing logistics and warehouses in major cities to store merchandise, I believe Granite REIT will continue to grow.
Granite REIT has a dividend increase streak of 11 years with a 5 year DGR of 4.4% and a 10 year DGR of 14.3%. Given the relatively low FFO to payout ratio, I believe Granite REIT will be able to continue raising its dividend payouts for many years to come.
3. CT REIT (CRT.UN)
CT REIT owns a Canada-wide portfolio of high quality assets leased primarily to Canadian Tire Corporation with annual rental growth built into long term leases. This relationship is very unique because it gives CT REIT insight into Canadian Tire Corp’s long term plans and allows CT REIT to shape its strategy and plans accordingly.
This tightly knitted relationship also means CT REIT has been able to successfully navigate the challenges the COVID-19 pandemic has caused. CT REIT ended 2020 with over 99% in both occupancy and rent collections and managed to come through with two distribution increases for shareholders. Considering many REITs were forced to cut dividends through the pandemic, this was a very impressive feat.
- Sector: Retail REIT
- Dividend Yield: 4.86%
- FFO Dividend Payout Ratio: 73.8%
- 5 Year Dividend Growth Rate: 3.9%
- Dividend Increase Streak: 9 years
As of September 30, 2021 CT REIT had 986,000 square feet of gross leasable area under development, of which approximately 96% is subject to committed lease agreement. This is an improvement of 1% on committed lease agreement compared to the previous quarter.
At the same time, the company also announced nine new investments. When completed, they are expected to represent approximately 449,000 square feet of incremental gross leasable area and earn a weighted average cap rate of 6.31%.
CT REIT is continuing to expand. The unique relationship with Canadian Tire means CT REIT will benefit from Canadian Tire’s corporate expansions.
4. SmartCentre REIT (SRU.UN)
SmartCentres REIT is one of Canada’s largest fully integrated REITs, with a portfolio featuring 168 strategically located properties in communities across the country. The company has $10 billion in assets and owns 34.2 million square feet of income producing value-oriented retail space with an industry-leading occupancy rate of 97.3%, on 3,500 acres of owned land across Canada.
Unlike some of its peers in the retail REIT segment, SmartCentre REIT kept its dividend payout throughout the pandemic and did not cut its distributions. This shows SmartCentre has a good tenant base that continues to pay rents despite the hard time encountered through the global pandemic.
- Sector: Retail REIT
- Dividend Yield: 5.44%
- FFO Payout Ratio: 84.6%
- 5 Year Dividend Growth Rate: 2.8%
- Dividend Increase Streak: 7 years
Walmart is a big tenant for SmartCentre REIT with 73% of its properties anchored by Walmart and more than 25% of revenue coming from Walmart. The nice thing about being anchored by Walmart is that Walmart provides a lot of stability. When was the last time you saw a Walmart store closing? It is very rare for a Walmart store to close. Usually, once a Walmart location is opened, it stays at the same location for a very long time. Furthermore, Walmart acts as an “anchor” by increasing foot traffic to other retail outlets located in the same mall.
SmartCentre does not have the highest dividend growth rate but this is more than compensated by the higher than normal initial yield. If you like the retail REIT segment, SmartCentre REIT is a great choice.
5. Canadian Apartment REIT (CAR.UN)
To keep my list of Best Canadian REITs diversified, I thought it would make sense to pick a residential REIT. When it comes to the residential REIT segment, Canadian Apartment REIT is the largest REIT in the segment with a market cap of almost $10B. In comparison, the second largest Canadian REIT in the residential segment has a market cap of $2.59B.
As of December 31, 2021, Canadian Apartment REIT manages approximately 67,600 suites and sites across Canada and Europe.
Across Canada, Canadian Apartment REIT has seen an increase in occupancy rates in all the provinces. The company saw a slight decrease in occupancy rate from 98.4% in 2020 to 98.2% in the Netherlands. The increasing occupancy rate across the different regions is a great sign for the shareholders.
Overall, the company has an occupancy rate of 97.9% across all of its properties, which is a solid occupancy rate for residential REITs.
- Sector: Residential REIT
- Dividend Yield: 2.68%
- FFO Dividend Payout Ratio: 61.6%
- 5 Year Dividend Growth Rate: 2.6%
- Dividend Increase Streak: 10 years
Although both the initial dividend yield and 5 year DGR are not very high, I like Canadian Apartment REIT’s solid track record and its well diversified asset portfolio, as well as the fact that rental residential spaces will continue to be scarce, and likely to become even more so, especially in large urban areas.
Best Canadian REITs – Final Thoughts
It was interesting to go through the 38 Canadian REITs and pick out 5 for my best Canadian REIT list. I continue to like Canadian REITs as a way to invest in real estate rather than actually buying and managing properties ourselves.
It is important not to only look at dividend yields when it comes to determining which REIT to invest in. There are many financial metrics and factors you may not be able to find on the typical stock research sites. Therefore, it is very important to go through the quarterly and financial reports of the companies themselves. It is also important to go through the investor presentations to understand how the business is doing.
Looking for more information? Below are some articles that you might find useful:
- Want to track your portfolio? Take a look at my Google Spreadsheet Dividend Portfolio Template.
- Best Canadian dividend stocks
- Which discount broker should you use? Check out my Questrade vs. Wealthsimple Trade review.
- Geographically diversify your portfolio via one of the low cost ex-Canada ETFs like XAW.
If you don’t want to hold individual REITs, you might want to take a look at one of the Best Canadian REIT ETFs instead.
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Note: This blog post represents my opinion and not advice/recommendation to purchase these stocks. Before you buy any stocks, please consult with a qualified financial planner.