Should You Stick With Canada’s Largest REITs or Buy the Canadian REIT Index?

An exchange-traded fund (ETF) that broadly covers the real estate investment trust (REIT) market is a great way to diversify an investment portfolio and earn dividend income. Vanguard FTSE Canadian Capped REIT Index ETF (TSX:VRE) was created in 2012 and holds 18 stocks in its fund. The management fee is 0.38%. Its ability to tracking the underlying holdings is very good, with only a 0.06% tracking error. VRE rolled up and then down in 2017.

There are two things to say about VRE. First, the ETF is coming off a support level around $29 per share. Second, while this low-beta ETF bounces around, you get to collect a dividend yield of 4.13%.

By digging into VRE, you will find the holdings are broken down by REIT sector. The majority of the fund is industrial and office (30%), followed by retail (23%), and then residential (20%). VRE is, however, not equally weighted: RioCan Real Estate Investment Trust (TSX:REI.UN) is the largest holding at 14% of the net asset value, followed closely by H&R Real Estate Investment Trust (TSX:HR.UN).


RioCan has 300 properties in four provinces. Canadian Tire Corporation Limited, Loblaw Companies Limited, and Wal-Mart Stores Inc. round out the top three tenants in terms of RioCan’s revenue. Its occupancy rate is consistently in the mid to high 90s, which means its buildings typically do not sit empty. In 2015, RioCan had a multi-year low in occupancy at 94%. RioCan appears to be intensifying interest in the retail space along the Mississauga and Brampton corridor — two rapidly growing cities in the outskirts of Toronto.

Joint venture is a budding business direction for this company. RioCan is teaming up with residential construction businesses — some public, others private — to develop mixed facility buildings in urban-dense parts in Ottawa and throughout Toronto. Meanwhile, RioCan is taking steps to divest from struggling Sears Holding Corp.

What I like about RioCan:

  • Earnings per share have stabilized in recent quarters in line with a long-term EPS average of $2.2;
  • The debt-to-equity ratio is steadily dropping; and
  • The dividend payment is safe and dependable.

H&R Real Estate Investment Trust

H&R is a diversified REIT. In 2013, it acquired a retail company called Primaris. Currently, 38% of the H&R assets are retail, so it is not exactly in the same business of pure retail as RioCan. H&R’s dividend is 6.5%, higher than RioCan’s 5.9%. H&R has a five-year price-to-funds-from-operation ratio of 12.8, which is lower and therefore better than RioCan’s (16.8). Both H&R and RioCan have positive revenue growth over multiple years, but the edge here goes to H&R for its slightly higher revenue growth (8.3%).

Vanguard was wise to put these REITs as top holdings in VRE. Investors with a penchant for real estate could buy VRE for broader exposure or select the cream of the crop with RioCan and H&R.

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Fool contributor Brad MacIntosh has no position in any stocks mentioned.

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