Elevated interest rates and stubborn inflation that erode disposable income combined to significantly tame a once wildly performing Canadian real estate market in 2022. Housing affordability has declined to 30-year lows, and the MLS Home Price Index for February 2023 indicated a severe 15.8% year-over-year drop in average home prices in Canada.
However, no matter how the housing market trends going forward, CT Real Estate Investment Trust (TSX:CRT.UN) and Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) are some of the best real estate investment trusts (REITs) you could safely buy today and lock in some juicy passive-income yields while positioning your portfolio for long-term capital appreciation.
In its housing market update for March, the economics team at RBC believes the Canadian housing market is finally finding a bottom, “at least from a transaction volume perspective.” However, the multifamily housing sector faces higher political and regulatory risks as the housing market attracts greater scrutiny in 2023. Housing market turbulence could persist for longer.
That said, whatever happens to the housing economy, the two REITs below should continue to thrive in 2023 and beyond.
CT Real Estate Investment Trust is a retail REIT with a fully occupied portfolio (99.3% in-place occupancy rate on January 1, 2023), a committed tenant who has fully booked its property development pipeline, a decade-long history of committed distribution increases, and a juicy yield to boot. Its business is seemingly disconnected from the Canadian housing market and should continue to thrive no matter how housing economics change in 2023.
The trust holds a portfolio of 370 net-lease properties that are primarily leased to convenience store giant Canadian Tire. It’s natural for investors to be concerned about what happens if Canadian Tire were to face some financial challenges. However, the retailer has survived all recessions since 1945. It maintains an investment-grade credit rating (rent usually comes before debt payments). It has grown its earnings and raised dividends for 12 consecutive years now. Further, Canadian Tire owns a majority stake in CT REIT; what it pays as rent, it receives a good portion as income distributions. The key tenant isn’t likely to default on its rent soon.
What’s more, CT REIT’s monthly distributions are well covered, given its low payout rate of adjusted funds from operations of 74.5% in 2022 (one of the lowest payout rates in the REIT asset class). The REIT has raised distributions for 10 consecutive years now, and trustees and management remain committed to this investor-friendly “dividend-growth” policy.
Whatever happens to the Canadian housing market, investors in CT REIT units could keep receiving their monthly distributions from the trust’s fully occupied retail portfolio.
CT REIT’s distributions currently yield a respectable 5.6% annually.
Dream Industrial REIT
A high-flying Dream Industrial has shown strong upside momentum so far in 2023, as units have rallied by 21.3%. Investors can expect to receive a monthly income distribution that currently yields nearly 5% annually.
The trust held 257 industrial properties totaling 47.3 million square feet of gross leasable area (GLA) that had a stellar in-place occupancy rate of 97.9% going into 2023. It reported a strong 10.5% year-over-year increase in the same-property net operating income for 2022 and a 9% sequential increase in diluted funds from operations. The leasing business is robust as industrial property demand remains strong, as Canadian businesses increasingly outsource their supply chain and logistics operations after the nightmares seen in 2020-21.
Interestingly, the trust recently completed a $5.9 billion acquisition of close competitor Summit Industrial Income REIT in February through a joint venture with a cash-rich Singapore sovereign wealth fund GIC. The deal increases the co-owned properties’ footprint to 70 million square feet of GLA and makes Dream Industrial the largest industrial REIT in Canada.
Although the trust’s proportionate interest in the partnership is 10%, Dream Industrial acquired exposure to a highly potent premium quality property portfolio that increases its income-generating capacity in 2023 and beyond, no matter how the housing market performs.
Most noteworthy, the acquisition deal had no negative impact on Dream Industrial REIT’s balance sheet quality. Credit-rating agency DBRS Limited confirmed the REIT’s investment-grade “BBB” rating with a positive outlook. The trust’s financial health could improve going forward.