Investors with a long-term view are loading up on beaten-up top Canadian Real Estate Investment Trusts (REITs) in 2023. The timing is apt as property valuations recede while the national housing market continues to struggle. Loading up on real estate assets during periods of low property valuations (like today) could be a rewarding strategy over the next decade. Indeed, investors can lock in some juicy passive income yields on monthly income distributions, and an opportunity to book sizeable capital gains on top Canadian REITs when the real estate market finally recovers – and it will.
High-quality Canadian REITs including Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) and SmartCentres Real Estate Investment Trust (TSX:SRU.UN) could be great buys in April 2023. Let’s have a closer look at the many reasons why.
Dream Industrial REIT
Industrial properties have defied all Canadian odds so far in 2023 as rent growth remains strong, and occupancy rates remain high – even as new supply continues to pour in. Dream Industrial REIT is one of the largest publicly traded pure industrial REITs. From its fast-growing portfolio of highly-sought industrial properties, Canadian investors can get a real shot at significant capital gains, growing cash flows, and stable income.
In a first-quarter 2023 market report released this month, real estate management and consultancy firm CBRE reveals that the Canadian industrial properties market remains robust with high and rising net rents, high occupancy levels, and strong uptake of new supply. Industrial space availability at 1.9% edged up slightly during the first quarter. Industrial property portfolios remain almost fully occupied. The average rent at $15.99 per square foot during the first quarter of 2023 was 28.1% higher, year over year.
The Canadian industrial properties industry is still hot, and Dream Industrial REIT is your best place to be at this time, especially now as it pays a respectable yield of 4.8%.
The trust had a strong portfolio occupancy rate of 98.9% going into 2023. A recent $5.9 billion acquisition of Summit II properties increased its co-owned and managed portfolio from 47.3 million square feet to more than 70 million square feet of industrial gross leasable area. Meanwhile, a joint venture with GIC (a cash-rich Singapore sovereign wealth fund) expanded its management fee portfolio.
Most noteworthy, estimated market rents across Dream Industrial REIT’s portfolio exceeded the trust’s in-place base rent by more than 35% on December 31, 2022. The trust has ample capacity to raise rents at lease renewals in 2023 – an easy way to grow its net operating income. More than 9% of the REIT’s leases are expiring in 2023, and another 10% of leases should renew in 2024. Same-property net operating income should continue to grow.
Despite all the positive developments at Dream Industrial REIT lately, units are still down nearly 8% over the past year, even after a strong 24.2% gain so far this year.
SmartCentres REIT
SmartCentres REIT is a $3.8 billion open-air shopping mall property giant that’s morphing into a diversified property manager with a growing portfolio of residential properties, seniors housing, self-storage, and mixed-use assets located in Canada.
The trust’s portfolio was hit by a $570 million charge as the fair value of (mostly) its new residential assets declined during the fourth quarter of last year. Units traded down nearly 20% over the past 12 months, as falling home prices drag fair values lower. Resultantly, the current yield on the trust’s monthly distributions has soared beyond 7%.
I believe SmartCentres REIT is a top buy during this current dip. For the most part, today’s fair value losses will give way to future fair value gains when the housing market finds its feet again over the next few years. The overall portfolio remained almost fully occupied given a 98% occupancy rate going into 2023. Tenants will continue to pay contracted rents over the next 4.2 years (the portfolio’s average lease term). The trust’s 274 properties under development will come to market in due course and contribute to SmartCentres REIT’s growing net operating income.
Interestingly, smart money has taken notice. The trust’s multi-billionaire CEO Mitchell Goldhar recently scooped 157,700 SmartCentres REIT units on the open market, giving the trust a strong vote of confidence on its future business and financial prospects. Perhaps you should check the REIT out this April, and consider buying the dip and locking in a juicy income yield.
