Canadian income investors who are interested in real estate investment trusts (REITs) have a handful of high-yield REITs to choose from that now trade near 12-month lows.
Allied Properties REIT
Allied Properties (TSX:AP.UN) trades for $33.50 at the time of writing. That’s not far off the recent low of $32.30, which is pretty much where the unit price bottomed out in March 2020 and represents the lowest unit price investors have seen since early 2016.
Allied Properties is betting that strategic urban office space in major cities will still be in demand after the pandemic. Companies are now trying to figure out their home and office mix. Employees who want to stay home currently have leverage due to a tight jobs market, so it will be some time before the office property sector settles down to a new normal.
Allied Properties reported solid Q1 2022 results with average in-place net rent per occupied square foot hitting a record $25.13, up 4% year over year. Funds flow per unit came in at $0.60 for the quarter. The funds flow payout ratio was 72%, so the distribution should be safe.
Allied Properties completed a large acquisition at the end of Q1 2022 that increased the size of its urban office portfolios in Montreal, Toronto, and Vancouver. Allied Properties issued equity at $50.30 per unit to fund 75% of the $794 million deal.
Across the full Allied Properties portfolio, a number of buildings are undergoing upgrades that should bring in higher average revenue once the work is completed and new tenants occupy the spaces.
Investors who like the office space sector might see the Allied Properties trust units as undervalued today. At the current price, you can pick up a 5.2% yield.
Dream Industrial REIT
Dream Industrial (TSX:DIR.UN) finished Q1 2022 with 244 assets (358 industrial buildings) valued at $6.025 billion, offering 44.4 million square feet of gross leasable space located in Canada, Europe, and the United States. The assets are primarily distribution and urban logistics properties and finished Q1 2022 with in-place and committed occupancy of 98.7%.
Dream Industrial generated $65.3 million in net rental revenue in Q1 2022 compared to $46.6 million in the same period the previous year. Diluted funds from operations came in at $56.6 million, or $0.22 per trust unit. The distribution rate per unit was $0.17, so the FFO covers the payouts.
In late April, the company announced a joint agreement with a sovereign wealth fund to form a $1.5 billion venture that will acquire land in the GTA and build logistics properties. Dream Industrial will hold a 25% stake in the partnership.
Dream Industrial trades for close to $12 per trust unit at the time of writing. That’s just above the 12-month low of $11.76 that occurred in recent days. The price is down nearly 30% this year but still up from the $8 low it hit in March 2020.
Investors who buy at the current price can pick up a 5.8% yield.
Is one a better buy?
Allied Properties and Dream Industrial both look cheap today, but investors have to be careful chasing the REITs on the way down in an era of soaring interest rates. Real estate companies carry significant debt. Most of the existing debt is at very low rates, but will likely have to be renewed at higher rate as the debt matures. This could put a pinch on cash available for distributions.
That being said, the selloff now looks overdone. These companies currently generate adequate cash flow to cover their payouts. If you only buy one for income, I would probably make Dream Industrial the first choice. Allied Properties, however, offers a decent return and might be an interesting play as a potential takeover target.
