Investors seeking exposure to real estate without owning income properties have a number of options to choose from in the TSX Index.
RioCan
RioCan (TSX: REI.UN) primarily owns shopping malls located in Canada’s six largest cities. The buildings sit on prime land, and the retail space in these top locations remain in high demand, despite the pain the retail industry went through over the past two years.
RioCan is diversifying its revenue stream through its mixed-use properties that are under development or already completed. The buildings combine retail on the ground floor with residential rental units above that provide steady income and a guarantee of customers for the retail tenants. The buildings are being built along key public transit routes. As more people get priced out of the housing market the demand for high-quality rental units is expected to increase.
RioCan slashed its dividend during the pandemic but has started to bump up the payout again now that its business has stabilized. The current monthly distribution of $0.085 per trust unit provides an annualized yield of 4.1% at the time of writing.
Allied Properties
Allied Properties (TSX: AP.UN) owns 195 rental properties in seven Canadian urban markets. At the end of 2021, the properties had a value of $8.4 billion. Another 11 properties under development have a $1.2 billion value.
The portfolio includes urban office buildings and data centres. Management took advantage of the downturn in the commercial property market to make 14 acquisitions in 2021 in Toronto, Calgary, Montreal, and Vancouver.
Allied Properties had more than 90% of its rental property leased at the end of 2021 with a weighted average term to maturity of 5.6 years.
The trust units trade near $44 at the time of writing and provide a 4% annualized yield. Allied Properties hit a low near $32 in 2020, but it is still way off the pre-pandemic high of $59 and appears undervalued.
Owning Allied Properties requires a belief that companies will still want to have offices in core urban locations once the pandemic is over. At this point, the shift to working from home remains popular, but that could slowly reverse in the next couple of years.
Risks
REITs carry a lot of debt. As borrowing costs rise, the amount of cash available for payouts to unitholders can get squeezed, unless revenue gains offset the increased debt-servicing expenses. The Bank of Canada is hiking interest rates this year, and bond yields are soaring. If borrowing costs move a lot higher and remain elevated for several years, REITs could take a hit.
Is RioCan or Allied Properties a better buy?
RioCan’s unit price has already recovered most of its pandemic losses, so there might not be much upside left at this point, unless management continues to raise the dividend at a steady pace. Allied Properties offers a similar yield right now and could deliver better gains in the next few years, but there is still uncertainty about the future demand for urban office space.
If you have a contrarian investing strategy, I would probably make Allied Properties the first choice. Otherwise, a split between the two REITs might be an attractive way to get exposure to some Canadian commercial real estate.
