The housing bubble has been growing in Canada for such a long time that many people have fallen into a false sense of security and have started to believe that the bubble might never burst. At least, that’s how a lot of people thought up until a few months ago, but with the way the housing market has grown in the aftermath of the pandemic crash, people have started to realize that it has gotten out of hand.
Many experts have started drawing comparisons to the 2008 housing crash in the U.S., which triggered the Great Recession and brought the economy to its knees. A significantly better outcome would be a cooldown compared to an outright housing crash. But if you still want to offset your housing-based assets to another class within the real estate sector, three commercially focused REITs might be the right fit for you.
A retirement residence company
Chartwell Retirement Residences (TSX:CSH.UN) is an open-ended real estate trust that operates the largest network of senior housing communities in the country. The portfolio consists of 200 properties, segmented into a few different sections, but from an NOI perspective, there are only two types of properties: retirement operations that make up 92% of the NOI and long-term-care operations.
The trust fully owns three-fifths of the properties under its management, and several projects are currently under development. The trust has shown decent growth in the last 12 months, but it’s still about 8.5% down from its pre-crash valuation. It offers a juicy 4.6% yield, which is reason enough to consider adding this to your dividend portfolio.
A retail-focused REIT
Choice Properties REIT (TSX:CHP.UN) is a Toronto-based commercial REIT with a primary focus on retail — the asset class makes up 77% of Choice Properties’s portfolio. A strong point in the REIT’s favour is that 71% of its retail NOI is generated by grocery- and pharmacy-anchored retail properties — i.e., two businesses that tend to perform well, even during harsh economic and market conditions.
122 out of its 730 properties are industrial (mostly warehouses and logistic properties), which is expected to turn into a major revenue driver thanks to the rise of e-commerce and the ideal placement of such properties in e-commerce supply chains. From a capital-appreciation perspective, Choice might not be a “choice” stock, but the 5.1% yield and the fact that it didn’t slash its dividends, despite a high payout ratio, make it an attractive dividend buy.
A high-yield REIT
If you are looking for something more reasonably valued as well as more generous compared to the stocks above, True North Commercial REIT (TSX:TNT.UN) might be the way to go. The REIT is offering an 8% yield at a payout ratio of 162%, which is low compared to its 2020 payout ratio, though still in the dangerous territory. The yield alone makes it one of the most attractive dividend stocks in the real estate sector.
The REIT has managed to turn things around from a revenue perspective. The portfolio is spread out in five provinces and is purely office-focused — an asset class that went through a rough phase during the pandemic (even compared to other commercial properties). But now that the country is reopening and people are going back to the office, office-focused REITs like True North might see revenues stabilizing again.
While commercial REITs haven’t really been a haven for investors during the pandemic, they might be a great safety net if the housing market crashes. The economic recovery means that two major segments, industrial and retail commercial properties, might become relatively more attractive in the coming months.
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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.