Ensure your clients check REIT management, diversification, and earnings before they invest
Real estate should be part of every balanced investment portfolio because it can provide stability. But, it can be expensive to buy and maintain. So, your clients can invest in a Real Estate Investment Trust (REIT) to add income and growth to their portfolio without having too much risk. This primer will provide them with some information on six of the most reliable REITs that are worth considering in Canada this year.
What is a REIT?
A REIT is an alternative way to directly buy real estate. It’s a pool of real estate assets which trade on the stock market exchange, so it offers some of the most attractive features of stock investing.
How can you pick a REIT?
As with any investment, you should do your homework before you decide to buy a REIT. The best ones generate the best returns. This can be a combination of dividend payouts and capital gains, so REITs need to consistently grow their revenue and earnings, so their dividends increase over time.
Here are three factors to consider when buy them.
- Management: Check out the management, its track record, and how it’s compensated. Profitability and asset appreciation are closely related to the manager's ability to pick the right investments and strategies. If its compensation is performance-based, it’ll be working for your best interest, too.
- Diversification: Since real estate markets fluctuate by location and property type, you need to buy properly diversified REIT. So, you don’t just want commercial real estate because a drop in occupancy rates can cause you portfolio problems Diversification usually means the trust has enough access to capital to fund future growth initiatives and properly leverage itself for increased returns.
- Earnings: Before you buy into it, look at a REIT’s funds from operations and cash available for distribution or dividends. They measure its overall performance and how much money is transferred to investors. Don’t use the REIT’s regular income numbers since they include property depreciation. Those numbers are only useful if you’ve already studied the other two signs, since it's possible that the REIT may be experiencing unusual returns due to real estate market conditions or management's luck in picking investments.
Best Canadian REITs for 2021
The best REITs in Canada have strong debt to asset ratios, usually around 50%. Many are lower, but that’s usually because the REIT plans to borrow to fund its expansion plans. The ones that are higher are usually trying to pay down debt
- Dream Industrial REIT Stock: Dividend yield: 7.04%. Dividend payout ratio: 53.38%. Market capitalization: $1.57 billion.
Dream might be the best combination of value and growth in the sector. The REIT began 2021 with 177 properties after selling some of its lower quality assets in 2019 and 2020. It used the proceeds from those sale to pay down debt and, starting 2021, it had debt-to-assets of around 30%. With such a low amount of debt, Dream had the capacity to make a lot of acquisitions, which it has.
- H&R REIT: Dividend yield: 9.10%, Dividend payout ratio: 116.01%. Market capitalization: $4.53 billion.
H&R is one of Canada’s largest real estate investment trusts. It is a very diversified REIT with real estate assets of retail, industrial, and residential properties spread throughout North America. It has 40 million square feet of leasable space that allow the company to pay its shareholders a high dividend yield.
- Summit Industrial Income REIT: Dividend yield: 5.18%. Dividend payout ratio: 41.66%. Market capitalization: $1.48 billion.
Summit is one of the top-ranking growth stocks trading on the Toronto Stock Exchange (TSX). It is an open-ended mutual fund REIT that focuses on owning and operating light industrial properties in Canada. It has a very high occupancy rate that allows it to generate substantial cash flow. Summit has a sustainable dividend payout ratio and the ability to maintain a compounded annual growth rate of 8%.
- Canadian Apartment Properties (CAP) REIT Stock: Dividend yield: 2.57%. Dividend payout ratio: 18.20%. Market capitalization: $9.38 billion.
CAP REIT is one of the largest REITs in Canada. It owns about 65,000 rental apartments, townhouse suites, and manufactured housing sites in Canada, Ireland, and the Netherlands. It is a resilient TSX performer, which had record sales in 2020, but also a much lower decline during the recession than the broader market pullback. It has increased its revenue again in 2021. CAP’s geographical diversity has helped to insulate it.
- InterRent REIT Stock: Dividend yield: 1.82%. Dividend payout ratio: 9.26%. Market capitalization: $2.18 billion.
InterRent looks for problem properties with sub-par management, outdated units, or a big need to be renovated and restored. It buys them at a large discount and spruces them up, taking them to a higher standard. The business model is risky, but the company mitigates the risks and continues to grow. It has been one of the top-performing stocks on the TSX with good investor returns.
- Boardwalk REIT: Dividend yield: 3.41%. Dividend payout ratio: 133.44%. Market capitalization: $1.46 billion.
Boardwalk provides homes in more than 200 communities with more than 33,000 residential units. It is a mid-market capitalization residential REIT with a long-standing reputation for its high occupancy rates, consistent growth, and overall exemplary success. It had some trouble a few years ago, when it was overexposed in Alberta and those markets crashed with the drop in oil prices. But, it’s since diversified its portfolio, disposed of its non-core assets, and diversified its overall holdings to build a more reliable reputation in the industry.