Investing in real estate investment trusts (REITs) remains an attractive option for income investors. Generally, a REIT has a diversified base of cash-generating assets that allows it to generate a steady stream of cash flows. As cash flows are stable and predictable, REITs pay dividends to investors that are higher than most other companies in the stock market.
The best REITs are those that generate outsized returns compared to the broader market. It means REITs should help an investor grow long-term wealth via a combination of dividend payouts and capital gains. Some Canadian billionaires are active in REIT, so investors are in good company. So ideally, REITs need to grow their revenue and earnings consistently that will help them increase dividends over time.
Before we take a look at the top REITs that Canadians can buy for 2021, it’s imperative to consider a few characteristics that need to stand out for a stock to be attractive. These include:
A strong balance sheet
REITs have significant debt on their balance sheet. Real estate companies take on debt to fund acquisitions and grow their portfolio of assets. Here, investors should consider leverage ratios such as debt-to-EBITDA (ideally below 6x) and debt-to-market cap (ideally below 50%). A REIT should have the financial flexibility to acquire additional properties and grow its portfolio at a steady rate.
We know that REITs distribute a significant portion of their cash flows as dividends. However, if these companies have a conservative payout multiple, it will allow the management team to lower debt, invest in growth opportunities or even increase dividend payments which will increase long-term shareholder wealth. A REIT with a payout ratio of less than 75% compared to its FFO (funds from operations) should be a good bet.
Opportunity for growth
A REIT can increase its FFO and dividends either by acquiring new properties or by increasing rents at existing properties. Generally, the former is considered a better strategy by long-term investors and REITs should have an impressive pipeline of acquisitions to increase revenue and profit margins.
Keeping these factors in mind, let’s take a look at some of Canada’s top-performing REITs that can be found on the stock market.
One of Canada’s largest real estate investment trusts, H&R REIT’s total assets stand at over $13 billion. It has ownership interests in high-quality offices in North America comprising more than 40 million square feet. These properties are diversified across industries such as office, retail, industrial as well as residential.
H&R REIT has over 470 properties with a debt to total assets multiple of 47.7%. Its payout ratio as a percentage of its FFO is 40.8%. The company has an annual distribution per unit of $0.60 indicating a forward yield of 4.5%.
Around 43% of its properties are located in the U.S. followed by Ontario at 31% and Alberta at 17%. Further, at the end of 2020, close to 70% of its total portfolio consisted of Retail and Office properties, two verticals that were decimated amid COVID-19. In order to tide over an uncertain environment, the REIT increased its liquidity position through a $500 million credit facility and decreased its dividend distributions as well.
Killam Apartment REIT
This residential REIT is one of Canada’s largest residential landlords. It owns, operates, develops, and manages a $3.8 billion portfolio of apartments and MHC (manufactured home community) properties. Killam Apartment has properties located in Atlantic Canada’s six largest urban centers as well as in Ontario, British Columbia, and Alberta. The REIT aims to enhance shareholder wealth by increasing earnings from its existing portfolio, develop high-quality properties in its core markets as expand the portfolio and diversify geographically via accretive acquisitions.
With a market cap of $1.98 billion and an annual distribution yield of $0.68 per unit, Killam Apartment REIT stock has a forward yield of 3.56%. In the last five years, the stock has also surged by 54% and is up 87% since its IPO in 2016.
Killam is one of Canada’s top REITs with a growing portfolio. Further, around 36% of its NOI (net operating income) in 2020 was generated from apartments built in the last decade. In the last five years, Killam has increased NOI at an annual rate of 11.8%. Comparatively, its FFO and distribution per unit were up 3.8% in this period. This allowed the REIT to reduce its payout ratio from 91% in 2016 to 82% in 2020.
Slate Grocery REIT
This REIT is an owner and operator of U.S. grocery-anchored real estate. Slate Grocery REIT owns and operates around $1.3 billion of critical real estate infrastructure across major U.S. metro markets. Its defensive portfolio and strong credit tenants provide unitholders with durable cash flows.
Slate Grocery is managed by Slate Asset Management which is a real estate-focused alternative investment platform that has $6.5 billion in assets under management. It ended Q1 with a portfolio occupancy of 93.1% and a 6.6% rental spread on new leases. The REIT has also increased its distribution per unit from $0.758 in 2015 to $0.864 in 2021 indicating a forward yield of 6.93%.
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Its top five tenants include grocery heavyweights like Kroger, Walmart, Ahold Delhaize, Publix, and Southeastern Grocers that account for 27.8% of the REITs annual base rent. Slate Grocery REIT has 80 properties located in 20 states spanning 10 million square feet.
Choice Properties REIT
Choice Properties is one of Canada’s diversified REITs. It owns and manages a portfolio of 730 properties that total 66.1 million square feet of gross leasable area. It includes retail properties leased to necessity-based tenants as well as industrial, office and residential assets that are concentrated in attractive markets.
Choice Properties also has a strategic alliance with Loblaw which is Canada’s leading retailer providing it with a significant competitive advantage and long-term growth opportunities.
The REIT has a market cap of $4.66 billion and a distribution per unit of $0.74, indicating a forward yield of 5.23%.
Canadian Apartment Properties REIT
One of the largest REITs in Canada, Canadian Apartment Properties owns around 57,000 suites that include townhomes and manufactured housing sites. Further, it also owns 5,800 suites in the Netherlands indirectly via its investment in ERES and an additional 3,800 suites in Ireland.
Despite the ongoing pandemic, Canadian Apartment Properties managed to post record sales in 2020. It experienced solid organic growth as its same-property net operating income was up 3.9%. Its sales climbed 13% year over year due to portfolio growth, strong occupancy rates, and increased rents.
In the first quarter of 2021, the REIT’s operating revenue was up 5.3% at $227.5 million while net operating income rose 6.2% to $146.7 million. With a payout ratio of 62.3%, Canadian Apartment Properties has a forward yield of 2.4%. Its overall occupancy rates in Q1 were 97.3% compared to 98.2% in the prior-year period. The REIT collected 99% of rents due in the March quarter while its bad debts as a percentage of operating revenue were low at 0.6%.
A growth-oriented real estate investment trust, InterRent REIT aims to increase shareholder value by increasing distribution through acquisitions and ownership of multi-residential properties.
InterRent is focused on expanding its portfolio primarily within markets that have exhibited stable market vacancies and offer opportunities for accretive acquisitions. This REIT has been one of the top-performing stocks on the TSX and has risen by 782% in the last decade. Despite its market-thumping gains, InterRent also provides investors with a forward yield of 2.1%.
InterRent’s funds from operations rose 11.8% year over year to $16.2 million in Q1 of 2021 compared to $14.5 million in the prior-year period, Its average monthly rent per suite was $1,325 indicating a year over year growth of 4.3%. The occupancy rate in Q1 was 91.3% which was 400 basis points lower than Q1 of 2020. Further, the same property NOI fell 1.8% year over year to $24.2 million.
InterRent confirmed it continues to support tenants that are experiencing financial hardship due to COVID-19 and have entered into rent deferral agreements with 0.5% of residents.
Boardwalk REIT provides homes in more than 200 communities with over 33,000 residential units totalling 28 million net rentable square feet. It has a proven long-term record and the stock has a forward yield of 2.65%.
In Q1 of 2021, its funds from operations (FFO) rose 4.8% to $0.65 per unit. It experienced strong same-property revenue and NOI growth in the provinces of Ontario, Quebec, and Saskatchewan.
The occupancy gains and revenue optimization during Q1 provided Boardwalk with a positive trend in its Alberta portfolio. In April 2021, its occupancy rate rose by 100 basis points to 95.7% compared to February. In Q1, same-property occupancy rates were 94.9%. The REIT ended Q1 with $294 million in liquidity.
Boardwalk’s total rental sales were down by a marginal 0.2% year over year at $115.8 million in the March quarter. Comparatively, adjusted funds from operations rose 9.1% to $24.8 million while AFFO per unit gained 8.9% at $0.49, indicating a payout ratio of just over 50%.
WPT Industrial REIT
An open-ended REIT, WPT stock has gained 63% in the last five years. Its portfolio consists of 37.2 million square feet of gross leasable area that consists of 109 industrial properties located in 20 states south of the border. This REIT provides investors with an attractive forward yield of 4.4%.
WPT’s strategy is to grow its footprint and of institutional-quality distribution and logistics assets in top-tier industrial markets. In Q1, WPT created a new joint venture seeded with 13 stabilized investment properties with a value of US$370 million. It also generated US$8.5 million in private capital fee revenue. The REIT collected 99.8% of billed rent for Q1 continuing its strong record of collections.
Same property NOI rose 2.5% due to strong leasing spreads in the last 12-months. Further, FFO and AFFO per unit were up 62% and 87% respectively year over year driven by acquisitions.
WPT’s CEO Scott Frederiksen said, “WPT produced solid quarterly results driven by robust operating activity, meaningful progress on our capital recycling initiative and a strengthened balance sheet. The formation of a new stabilized joint venture demonstrates the REIT’s ability to attract and expand relationships with strong institutional capital partners to diversify our capital resources. With our modern, well-located distribution and logistics portfolio, deepening partnerships with global institutional capital partners, and a growing development pipeline, we expect our momentum to continue throughout the remainder of the year.”
Summit Industrial Income REIT
The final stock on our list is the Summit Industrial Income REIT. Another open-ended mutual fund REIT, Summit Industrial is focused on growing and managing a portfolio of light industrial properties across Canada.
For its investors, the REIT aims to maximize FFO through effective property management, accretive acquisitions as well as innovative financings, and property development opportunities. Alternatively, for its tenants, its goal is to provide modern and efficient high-quality industrial properties in locations close to major transportation links and high-growth population centers.
Summit Industrial REIT explains light industrial properties are one-story properties located in or near major cities. These properties are home to activities such as warehousing and storage, light assembly and shipping as well as professional services among others. This focus on light industrial properties is due to the long-term stability of the sector. Historically, these properties have managed to generate income returns at or near the top of the Canadian real estate industry.
These returns can be attributed to the sector’s strong fundamentals that include lower market rent volatility and lower operating costs as well as a broad and diverse tenant base, coupled with low CAPEX and maintenance costs.
In the last five years, Summit Industrial REIT has returned 164% and currently provides investors with a forward yield of 3.5%.
The final takeaway
We can see that Canadian REIT stocks provide you with an opportunity to gain exposure to the country’s residential, commercial as well as industrial sectors. You can use this article as a starting point in your investment journey and identify similar companies that have strong fundamentals, an attractive yield, and a low payout ratio that will allow you to derive consistent long-term returns.
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