A real estate investment trust (REIT) owns, operates, and finances real estate that generates income. REITs are similar to mutual funds when it comes to their structure as they pool in the capital from numerous investors. Because of that, individual investors are able to earn an income from real estate investments, without investing a large amount of money to acquire real estate. It also frees them from the burden of managing and financing real estate. There are some great Canadian REITs for individual Canadian investors to select and in this post we will take a look at some of the best ones. Most of the Canadian REITs tend to have a debt-to-asset ratio of 50%. A lot of them are also lower, but that’s mainly because REIT plans to borrow to fund expansion plans. The ones that are higher usually try to pay their debt down, a process that is carried out by selling non-core assets or issuing units. Now, let’s get started with the list.
REITs Canada: Which Are the Best for Investing Your Money?
What is REIT and how does it work?
A real estate investment trust (“REIT”) is a company that owns, operates or finances income-producing real estate. REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.
How does a REIT make money?
They make the most money by collecting rent on the property they own. As the property values go up, the values of the shareholders’ investments grow too, and the commercial properties generate even more income. REITs make money through buying and selling properties.
Here are the Best Canadian REITs for you to invest in:
SmartCentres REIT (TSE: SRU.UN)
Kicking off our list of the best Canadian REITs, is SmartCentres Real Estate Investment Trust. It is one of Canada’s largest fully integrated REITs, with a best-in-class portfolio featuring 166 strategically located properties in communities across the country. SmartCentres has approximately $10.4 billion in assets and owns 33.8 million square feet of income producing value-oriented retail space with 97.4% occupancy, on 3,500 acres of owned land across Canada. SmartCentres continues to focus on enhancing the lives of Canadians by planning and developing complete, connected, mixed-use communities on its existing retail properties. A publicly announced $11.9 billion intensification program ($5.4 billion at SmartCentres’ share) represents the REIT’s current major development focus on which construction is expected to commence within the next five years.
Most of SmartCentres REIT’s properties are shopping centres with a Walmart on the property or right beside it.
While only 25% of rent comes from Walmart, the real benefit of having Walmart on your properties is all the traffic it brings to the other stores in the shopping centre.
SmartCentres as it currently is, can be termed cheap.
In 2019 SmartCentres earned $2.07 in AFFO, so SmartCentres is trading at just 12x 2019 AFFO. Based on 2019’s NOI, SmartCentres is trading at a 5.8% cap rate.
With most of its properties in major cities, and with lots of development/growth potential, that is very cheap. While the valuation is definitely great, it’s the development that is the true highlight.
H&R REIT (TSX: HR.UN)
Next on our list of the best Canadian REITs, is H&R REIT (TSX: HR.UN). It has been beaten up because of a combination of poor short-term results, a little uncertainty surrounding a key asset, the impact of COVID-19 on the portfolio, and, of course, a recent distribution cut.
H&R REIT is one of Canada’s largest real estate investment trusts with total assets of approximately $13.3 billion on September 30, 2020. H&R REIT has ownership interests in a North American portfolio of high quality office, retail, industrial and residential properties comprising over 40 million square feet.
Let’s start with The Bow, H&R’s marquee asset. The downtown Calgary landmark houses Ovintiv — the energy company formerly known as Encana. But the official head office is slated to be moved to Denver.
Although Ovinitiv is still responsible for the lease – which lasts another 18 years – investors are worried it will soon pull out of Calgary completely.
H&R also came out with some disappointing results lately, which included a dip in operating income caused by some unexpected vacancies.
Remember, H&R owns a lot of regional mall real estate in Canada, a segment of the market that is getting hit especially hard by online retailers and COVID-19. Investors are nervous about these assets, and rightfully so.
The REIT plans to expand in the U.S. residential market. The Canadian REIT recently completed a large project in Long Island, New York and has developments in various stages of completion in places like Miami, San Francisco, Seattle, and Austin.
Automotive Properties REIT (TSX: APR.UN)
Next on our list of the best Canadian REITs, is Automotive Properties REIT. It is an unincorporated, open-ended real estate investment trust focused on owning and acquiring primarily income-producing automotive dealership properties located in Canada. The REIT’s portfolio currently consists of 64 income-producing commercial properties and one development property, representing approximately 2.5 million square feet of gross leasable area, in metropolitan markets across British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. Automotive Properties REIT is the only public vehicle in Canada focused on consolidating automotive dealership real estate properties. This small-cap specialty REIT has loads of potential.
Automotive Properties REIT works by buying car dealership real estate, and then renting these locations back out to operators.
The company’s tenants usually sign long-term agreements which extend past a decade because the operators value stability. It’s a lot harder to move a car dealership than it is a clothing store.
Since the company’s 2015 IPO, it has more than doubled the size of its portfolio to 61 dealerships and 2.3 million square feet of leasable space.
There’s still ample growth potential too. Various dealer operators are using Automotive Properties to accelerate their own growth prospects, since they can expand much faster if they don’t have to buy the underlying real estate.
Dream Industrial REIT (TSE: DIR.UN)
Next on our list of the best Canadian REITs, is Dream Industrial REIT. It is an unincorporated, open-ended real estate investment trust. As at September 30, 2020, Dream Industrial REIT owns and operates a portfolio of 266 industrial properties comprising approximately 26.6 million square feet of gross leasable area in key markets across North America and a growing presence in strong European industrial markets. Dream Industrial REIT’s objective is to continue to grow and upgrade the quality of its portfolio and to provide attractive overall returns to its unitholders.
Industrial real estate is the hot sector right now. Everyone wants to own industrial properties that can benefit from the growth in E-commerce.
Dream Industrial REIT might be the best combination of value and growth in the sector.
The REIT sold some of its lower quality assets and kicked off 2020 with 209 properties after. The proceeds from those sales were used to pay off some of the firm’s debt. Going into 2020 it had debt-to-assets of just 23.7%.
With such a low amount of debt, Dream Industrial had the capacity to make a lot of acquisitions. And it has. Management has said they can make another $275 million of acquisitions while still keeping its debt-to-assets below 40%. Even after all of that growth, Dream Industrial is still likely to continue being a very safe bet going forward.
Not only has it grown by acquisition, it is also growing by increasing its rents. In the third quarter, the leases the REIT signed were 37% higher than the leases that expired.
Those rental spreads will probably continue (though maybe not at 37%!) and keep contributing to Dream Industrial’s growth.
Because it has grown so much this year, it is tough to tell what Dream Industrial’s financials will be next year.
Plaza REIT (TSE: PLZ.UN)
Next on our list of the best Canadian REITs, is Plaza REIT. It is an open-ended real estate investment trust and is a leading retail property owner and developer, focused on Ontario, Quebec and Atlantic Canada. Plaza’s portfolio at September 30, 2020 includes interests in 272 properties totaling approximately 8.6 million square feet across Canada and additional lands held for development. Plaza’s portfolio largely consists of open-air centres and stand-alone small box retail outlets and is predominantly occupied by national tenants.
Plaza Retail REIT (TSE:PLZ.UN) is in one of the best positioned among retail REITs to benefit from the COVID-19 pandemic.
Plaza predominantly owns shopping plazas and quick service restaurants, and the majority of them have grocery stores or pharmacies as anchor tenants.
Over 91% of Plaza’s rent comes from national tenants like Starbucks, Tim Hortons, Staples, Sport Check, Sobeys, Dollarama, Canadian Tire and many more, who have the strength to ride out the pandemic.
Investors are underestimating how resilient Plaza’s tenants are.
Not only are the REIT’s current properties strong, but Plaza is working on a number of developments, which will add to Plaza’s growth for a number of years. If retailers start going out of business, it could give Plaza a lot of shopping centres to buy and fix up.
The price of the REIT doesn’t reflect all of that growth potential.
Plaza trades at just 8.5x 2019’s FFO. A REIT with Plaza’s growth – it grew 19% in 2019 and even in 2020 has grown 2.8% before lease buyout expenses – should trade at a much higher multiple.
Artis REIT (TSX: AX.UN)
Rounding up our list of the best Canadian REITs, is Artis. It is a diversified Canadian real estate investment trust investing in industrial and office properties in Canada and the United States. Since 2004, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of commercial properties in select markets in Canada and the United States. As of September 30, 2020, Artis’ commercial property comprises approximately 23.8 million square feet of leasable area.
Artis REIT (TSE:AX.UN) has undergone a lot of change in the past few years, and that is likely to continue.
Like other Canadian REITs, Artis REIT was weighed down by a lot of exposure to the Calgary office market in 2015.
It also had too much debt and was paying out more than 100% of cash flow in distributions. The distribution was cut, non-core assets were sold, and Artis embarked on a new strategy, one that emphasized stability and its strong office and industrial assets.
As part of that strategy management announced this fall that it wanted to spin off its retail portfolio into a new REIT.
That prompted Sandpiper Group, a Canadian activist REIT investor, to object and start a proxy fight with management to get control of the REIT.
Sandpiper wants to sell the retail properties slowly, which it says will bring in a higher price for them. The activist also wants Artists to raise the distribution again, cut costs (management is VERY well paid), and continue the asset sales to focus on the high quality properties.
Both management and Sandpiper want to focus on industrial properties. 35% of net operating income comes from industrial assets currently, and Artis has a lot of properties where it wants to develop new industrial buildings.
The REIT has a goal of getting to 50% industrial exposure, a goal Sandpiper hasn’t argued with.
The payout ratio is 55% of AFFO, which is one of the lowest in the whole REIT sector.
Is now a good time to buy REITs?
As different markets and the economy go through their cycles, different investments provide opportunities for long-term growth. This rapid shift in the market cycle may mean that real estate investment trusts (REITs) are a good investment right now, and it could be REIT investors’ time to shine.
Can REITs make you rich?
Real estate investment trusts (REITs) have been wealth-creating machines throughout the years. As a group, they’ve outperformed stocks over the long term. A handful of REITs have really stood out for their ability to produce market-crushing total returns, enriching their investors in the process.
Are REITs better than stocks?
The data on REITs is clear. That has turned out to be a boon for the average investor because REITs have outperformed stocks over the long term, with many subsectors and specific REITs delivering superior returns. Because of that, investors should find a place for REITs in their portfolios.
So those were some of the best Canadian REITs for you to invest in. Along with listing some of the best options for you, we also covered some of the basics associated with REITs. Hopefully, you will be able to make a better decision on the matter now.