Investors: Why Choose REITs Over Direct Ownership

Two Canadian REITs in distinct sub-sectors are the next-best alternatives to buying real estate for investment purposes.

| More on:
Pixelated acronym REIT made from cubes, mosaic pattern

Image source: Getty Images

Canada’s housing market slumped in 2022, as buyers stayed on the sidelines due to rising mortgage costs. Sellers also took their properties off the market because of falling prices. The Canadian Real Estate Association (CREA) expects home sales to decline 1% from last year and prices to drop almost 6% year over year.

Since the situation remains fluid, if not uncertain, purchasing real estate for investment purposes isn’t advisable today. However, if you want exposure to the sector and to earn passive income, consider taking positions in real estate investment trusts (REITs). Owning shares of NorthWest Healthcare (TSX:NWH.UN) and Allied Properties (TSX:AP.UN) are your next-best alternatives.

Healthcare facilities

NorthWest Healthcare, a $2.42 billion global real estate investor and asset manager, owns and operates medical office buildings, hospitals, and clinics. The only REIT in the cure segment of the healthcare real estate spectrum rose to prominence in 2020 during the coronavirus breakout. It also forms value-added partnerships with the top healthcare operators in the world.

You can find 233 high-quality, income-producing properties across Canada, the United States, Australia, Brazil, Germany, the Netherlands, New Zealand, and the United Kingdom. NorthWest’s healthcare-focused portfolio offers unparalleled global scale, diversification, and resiliency. The weighted average lease expiry is 14 years.

Medical office buildings are akin to commercial buildings, typically multi-tenant properties, and the tenants are mostly necessity-based healthcare providers. Lessees are single tenants or hospital operators for hospitals and other healthcare facilities. Since leases are long-term, inflation-indexed, and under triple net lease structures, the REIT has no material property operating cost or capital expenditure risk.

Management expects demand for its healthcare partners’ essential services and spaces to house these services to increase with the aging populations and increased urban migration. An emerging class of assets is Life Sciences, and the long-term leases are with life science users focusing on research and development.

In the nine months that ended September 30, 2022, total property revenues and net operating income (NOI) increased 18.7% and 18.8% year over year to $330.3 million and $255.5 million, respectively. The REIT’s 52-week high is $14,42, but it trades at only $10.04 per share and pays a fantastic 8.01% dividend.

A unique and growing niche market

Allied Properties in the office sub-sector is unique, as it focuses on developing distinctive urban workspaces and urban data centre (UDC) spaces. The $3.8 billion REIT is at the front and centre of the ongoing consolidation, intensification and development in this growing niche. Management aims to satisfy the needs of the most demanding office and retail users.

Its real estate portfolio grew through acquisitions and development activities. Today, Allied Properties operate in seven urban markets: Calgary, Edmonton, Kitchener, Montréal, Ottawa, Toronto, and Vancouver. In the third quarter (Q3) of 2022, leasing activities were pretty stable. The rental revenue and NOI increased 10.2% and 9.7% to $157.16 million and $91.67 million versus Q3 2021.

The share price has risen to as high as $48.89 and could do so again when the real estate market rebounds. You can purchase this REIT at $29.74 per share — a good entry point. The 6.04% dividend yield should compensate for the depressed price.

Unstable market

The real estate market won’t stabilize if borrowing costs are too high and home prices continue to drop. That is precisely the reason investors should choose REITs over direct ownership.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $10,000

Here’s how to build a diversified portfolio with dividend stocks that, as a group, pay out in every month of…

Read more »

A plant grows from coins.
Dividend Stocks

Invest $10,000 in 2 TSX Stocks for $606/Year in Passive Income

Shares of these two fundamentally strong companies can start a worry-free passive income stream.

Read more »

dividends grow over time
Dividend Stocks

2 Top Dividend Stocks That Keep Raising Their Payouts

In addition to their solid dividend growth track record, these top dividend stocks also offer strong growth potential for the…

Read more »

Canadian Dollars
Dividend Stocks

Buy 500 Shares of This Super Dividend Stock for $1,830/Year in Passive Income

This super dividend stock offers high yield and visibility over earnings growth. It can help you earn $1,830 in passive…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

1 Magnificent TSX Dividend Stock Down 13% to Buy and Hold Forever

This dividend stock is down 13% as of writing, marking a significant opportunity for those seeking out income and value…

Read more »

Increasing yield
Dividend Stocks

Passive Income: The Investment Needed to Yield $10,000 Per Annum

Here's the math on how much you would need to invest to achieve $10,000 a year in passive income.

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Got $3,000? 3 Dividend Stocks to Buy and Hold for the Long Term

These TSX dividend stocks look cheap today.

Read more »

Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks

The TSX is lucrative to buy these magnificent dividend stocks in bulk and be proud of this decision 10 years…

Read more »