The rising interest rates since 2022 have triggered a selloff in stocks, particularly in Canadian real estate investment trusts (REITs) that may have slow growth. However, it doesn’t make Canadian REITs less of an income generator. In fact, the selloff has pushed up their cash-distribution yields, making them potentially greater monthly income vehicles.
Here are a few cheap Canadian REITs that Bay Street finds to be undervalued and investors can explore for monthly income.
NWH.UN, CSH.UN, and GRT.UN data by YCharts
A defensive Canadian REIT
Of the three REITs to be introduced, Granite REIT (TSX:GRT.UN) has declined the least at about 10%, as it has already bounced from its low. The industrial REIT’s cash-distribution yield is just under 3.8% at writing.
The fact that it commands the lowest yield versus the others indicates the business may be the least risky of the bunch. Indeed, since 2012, the industrial REIT has shown a general upward trend in its funds from operations (FFO) per unit growth. Specifically, its 10-year FFO per unit increased by 82% in the past 10 years — a compound annual growth rate of 6.2%.
At $85.29 per unit at writing, analysts place a 12-month price target of $96.10 on the REIT, which suggests a discount of 11%.
A global healthcare properties REIT yielding 8.6%
NorthWest Healthcare Properties REIT (TSX:NWH.UN) earns rental income from hospitals and other healthcare properties. Its revenue is diversified across continents, 233 properties, and more than 2,100 tenants. Its stable portfolio is characterized by a high occupancy rate of about 97%. Its cash flows are also supported by a long weighted average lease expiry of 14 years. It means it generates predictable cash flows.
Thanks to higher interest rates, the high-yield stock has corrected by a third! At $9.31 per unit at writing, the analyst consensus 12-month price target represents a meaningful discount of 25% for the stock. As a result, investors can lock in a rich yield of 8.6%. If interest rates decline again, buyers today would likely experience some awesome price appreciation.
A Canadian REIT with a 7% yield
For an interesting turnaround investment, you can turn to Chartwell Retirement Residences (TSX:CSH.UN). Management is working on improving its retirement portfolio occupancy rate, which has been in a decline since 2016 and hit a rock bottom of about 77% in 2021. Management also believes that its liquidity and cash flows will be sufficient for the stock to maintain its high yield of approximately 7%.
The stock is also pressured by high inflation that is increasing operating costs. At $8.79 per unit, the stock trades at a meaningful discount of 22%, which could result in price gains of more than 28% over the next 12 months.
Income tax on REIT cash distributions
REITs pay out cash distributions that are like dividends but are taxed differently. In non-registered accounts, the return of capital portion of the distribution reduces the cost base. The return of capital is tax deferred until unitholders sell or their adjusted cost base turns negative.
REIT distributions can also contain other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate, while half of your capital gains are taxed at your marginal tax rate.
Investor takeaway
Canadian REITs can greatly boost your monthly income, but note that they typically have little growth, which is why they may be down a lot in a higher interest rate environment. The other side of the coin is that they might experience awesome price gains when interest rates decline.
