There are a lot of REITs trading on the TSX to choose from, and a disciplined income investor should do their homework when choosing which one to include in their portfolio. I’ve had a look through a big chunk of Canadian REITs, and these two stocks are both undervalued and are poised to be outperformers in 2017.
Canadian Apartment Properties REIT (TSX:CAR.UN) is a fantastic residential real estate play with a terrific management team that knows their industry very well. Apartment-focused REITs will benefit from increased occupancy levels over the next year. Apartments are the most stable form of real estate, and the vacancy rates of energy-related markets have been surprisingly low at under 2%. We can expect the energy-related apartment vacancy rates to decrease even further as the price of oil starts to rally to higher levels.
Going into 2017, we can expect rents to continue to climb by between 2% and 3%, which will give a nice boost to the company’s bottom line.
Canadian Apartment Properties REIT has a very strong balance sheet and a solid dividend that’s one of the safest in the industry. It’s worthwhile to note that the company did not cut its dividend during the financial crisis, and dividend raises have been consistent after 2012 thanks to growing free cash flow.
The stock is ridiculously cheap right now with a mere 8.8 price-to-earnings multiple and a one price-to-book multiple. Both of which are lower than their five-year historical average multiples of 10 and 1.1, respectively.
The stock pays a bountiful 4% dividend yield, which is quite low for a REIT, but we can expect dividend raises in the years to follow, assuming that the housing market doesn’t collapse.
Smart REIT (TSX:SRU.UN) is another undervalued REIT that has its focus on shopping centres, but it has recently started to enter the apartments REIT sector with its latest project.
The stock has experienced a nasty sell-off lately, and it plummeted nearly 20%. I believe that there’s huge value to be had and this sell-off is overdone; value investors can do very well for themselves by picking up shares at current levels.
Shopping-centre-focused REITs are relatively stable but offer more growth upside than their apartment-focused counterparts. Smart REIT has over $8.6 billion worth of assets with 72% of its properties anchored by Wal-Mart Stores, Inc.
Having Wal-Mart as a tenant is a huge advantage that Smart REIT has over its competitors since the retail giant draws in a tonne of traffic, which also benefits its other tenants in the shopping centre.
The company has a very healthy balance sheet and a fantastic list of growth initiatives that will propel it higher in 2017. Buy the stock and collect the bountiful 5.4% dividend yield, and hang on as it starts rebounding in the new year.
The average age of its retail properties is 12.6 years, which is among the youngest in the industry. This means that maintenance and expenditure costs will be a lot lower than its competitors.
Both of these REITs are high-quality businesses that have been beaten up. They represent huge value for the income investor today. If you’re looking to gain some REIT exposure, then pick up shares of one or both of these companies today.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any stocks mentioned.