2 Canadian REITs Yield up to 7%: Should You Buy?

Do you want income from real estate? Here are two Canadian REITs you may be interested in and what stands out from each.

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Investors buy Canadian real estate investment trusts (REITs) primarily for income. H&R REIT (TSX:HR.UN) and BTB REIT (TSX:BTB.UN) are diversified REITs. They conveniently pay monthly cash distributions, which make them potentially nice income investments in the Tax-Free Savings Account (TFSA). Both were hit by the pandemic and consequently cut their dividends. One pays a safer dividend today. Let’s compare the two to see which may be a better buy.

H&R REIT is cheaper

Having a market cap of $4.7 billion makes H&R REIT one of the largest REITs in Canada. After reducing its office exposure in Calgary, the REIT has about 442 properties. Based on the fair value of its investment properties, H&R REIT’s portfolio has 35% allocated to retail properties, 32% to office properties, 25% to residential, and 8% to industrial.

Consequently, the quality of the REIT’s office portfolio has improved. The office property sales meaningfully reduced the diversified REIT’s exposure to Ovintiv, a large oil and gas producers in North America, from 12% to 2% and allowed H&R REIT to improve its leverage ratio. Additionally, this portfolio has a high occupancy of 99% and a long average remaining lease term to maturity of close to 12 years. It also enjoys a cap rate of almost 6.6%.

H&R REIT’s retail portfolio is decent. It has a high occupancy of 90% and a long average remaining lease term to maturity of more than six years. It also enjoys a cap rate of almost 6.8%. Its industrial portfolio is robust with a high occupancy of almost 97%, an average remaining lease term to maturity of about six years, and a cap rate of almost 5.3%. Its residential portfolio has assets in the U.S. with an average age of about 6.5 years and an occupancy rate of approximately 89%.

Overall, H&R REIT enjoys a cap rate of almost 6.1%. Notably, the dividend stock trades at a discount from its normal levels because it cut its cash distribution by about 50% during the pandemic. At $16.38 per unit, it offers a 4.2% yield on a payout ratio of approximately 45%. So, there’s room for the cash distribution to recover and for price appreciation for long-term investors.

BTB REIT yields +7%

Compared to bigger peer H&R REIT, BTB REIT is much smaller with a market cap of only $299 million. The overall portfolio has about 65 properties with a high committed occupancy of 92%. Its net operating income (NOI) is diversified as follows: 54% from office properties, 32% from retail properties, and almost 14% from industrial properties. Its portfolio is concentrated in Montreal (51% of NOI), Quebec (33%), and Ottawa (16%).

During the pandemic, the diversified REIT cut its cash distribution by close to 29%, which wasn’t nearly as bad as H&R REIT. As a result, it provides a higher yield and maintains a payout ratio that is also higher than H&R REIT’s. Its payout ratio this year is estimated to be roughly 73%. The payout ratio should be sufficient to protect its juicy yield of 7.4%.

The Foolish investor takeaway

Income investors may be more attracted to BTB REIT for its higher yield, which doesn’t appear to be in danger. However, between the two diversified REITs, H&R REIT is the better buy. It offers a bigger margin of safety, provides a safer yield, and could potentially deliver higher total returns in the near term due to its cheaper valuation.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Kay Ng has no position in any of the stocks mentioned.

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