2 Commercial REITs For Prudent Investors

2 Commercial REITs for Prudent Investors

Commercial REITs offer you exposure to asset classes most investors don’t have access to, but they also offer robust growth and dividend potential.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published May 15, 2022 3:45 pm EDT

The housing bubble in Canada has started to shrink. It’s not as dramatic as it sounds. The sales data from the four most important housing markets in Canada shows that the sales are slowing down, and it might be a direct consequence of the Bank of Canada raising interest rates.

A controlled shrinking is significantly more desirable than an unpredictable burst, but prudent investors might still prefer staying away from the residential market, even via indirect REIT investments. For such investors, commercial REITs are an ideal source of capital growth and dividend potential.

A commercial REIT for growth

If you want to buy a commercial REIT for its capital-appreciation potential, Dream Industrial REIT (TSX: DIR.UN) is a compelling option. It had a decent growth pace before the pandemic and even post-pandemic, but the current correction phase has adversely disrupted the dynamics. However, even the downfall has yielded a major positive — a juicy yield.

Thanks to the 21% decline from its peak, the REIT is currently offering a juicy 5% yield at one of the most discounted valuations — not just in the real estate sector but also in the TSX. The price-to-earnings multiple is at 3.47, and the price-to-book multiple is 0.8 times.

The growth potential of the REIT can be attributed to its portfolio. Instead of heavy industrial properties, the REIT mostly owns light industrial, urban logistics, and distribution properties. These are ideally positioned to rise in value (and demand) thanks to the advent of e-commerce.

A commercial REIT for dividends

For investors that are interested in REITs for their more traditional forte — dividends — True North Commercial REIT (TSX: TNT.UN) is an amazing option right now. Not only is it discounted and modestly undervalued, but it’s also offering a mouthwatering yield of 9.6%. At this rate, the REIT can return you back the capital you invested in it in about 11 years.

The REIT has two more things going for it. One is its capital-preservation potential. Apart from a few market-driven dips, the REIT usually manages to keep its price afloat or even grow it a bit. So, if you buy the dip and hold it long enough, your chances of gaining money via capital appreciation are much higher than your probability of losing money.

Another feather in this REIT’s cap is that it didn’t slash its payouts in 2020, even though its payout ratio more than doubled from 2019. This is quite impressive, considering the pure-play office property orientation of the REIT. The portfolio is decent enough, with 46 properties spread out over five provinces, worth about $1.4 billion.

Foolish takeaway

The housing market might be slowing down, but it’s still a long way off from becoming affordable enough for most first-time home buyers. But if it crashes, affordable housing might become a reality for many, and its impact would be seen in many residential REITs as well. So, when investing in real estate in Canada, it’s prudent to keep this market reality in mind.