The aggressive rate hike cycle by the Bank of Canada that started in 2022 caused the nearly 13-month downtrend in the housing market. While the central bank is on temporary pause, inflation must go down faster before it moves to cut rates. Meanwhile, homebuyers and real estate investors watched the market correction from the sidelines.
From an investment perspective, higher interest rates dealt a heavy blow to the real estate sector, including real estate investment trusts (REITs). However, investors can improve their portfolio diversification by adding exposure to selected sub-sectors. Two REITs are safe and well-positioned to overcome headwinds or whatever the housing market does in 2023.
Industrial
Dream Industrial (TSX:DIR.UN) continues to beat the broader market year to date, up 28.3% versus 6.2%. At $14.82 per share, the outperforming stock pays an attractive 4.72% dividend. Industry experts say industrial properties are sensitive to the economy.
Fortunately, the rise or shift to e-commerce has created a long-term tailwind for industrial properties. Market analysts see the sub-sector as on the radars of real estate users and investors. The third-party logistics industry will continue to drive leasing activity this year, while the ever-shrinking available space should push industrial rental rates higher.
Besides the positive outlook, warehouses or distribution facilities have stronger pricing power. The $4.1 billion REIT owns and operates a portfolio of industrial properties. The committed occupancy of Dream’s leased properties (257 in total) in Canada (66%), Europe (34%), and the U.S. (25.4%) is 98.9%.
Management believes focusing on modern, functional, and well-located urban and distribution assets is a competitive advantage. Dream recently formed a joint venture with asset management firm and Singapore-based GIC to acquire rival Summit Industrial REIT. The partnership will provide a solid and growing recurring revenue stream.
Another compelling reason to invest in this REIT is the robust industrial fundamentals that drive rental rate growth. In 2022, net rental income and net income rose 29.2% and 16% year over year to $281.6 million and $705.9 million, respectively.
Brian Pauls, CEO of Dream Industrial, said 2022 was another successful year for the REIT despite the macroeconomic headwinds. He adds, “Industrial fundamentals remain strong as we continue to see robust demand for high-quality industrial assets, low availability rates, and increasing rents across all our markets.”
Grocery-anchored
Slate Grocery (TSX:SGR.U) owns a growing portfolio of grocery-anchored properties (100%) in major metro markets across the United States. The $606.8 million REIT produces durable cash flows because of it’s resilient property portfolio and strong credit-rated tenants.
For the full-year 2022, rental revenue and net operating income climbed 32.1% and 27.3% to US$50.7 million and US$40.6 million, respectively, versus the full-year 2021. Its CEO, Blair Welch, said, our year-end results show that Slate Grocery REIT has maintained stable growth and performance throughout 2022, despite broader market volatility and uncertainty.”
Welch is confident the fundamentals in the grocery-anchored sector will provide tailwinds for Slate’s portfolio in 2023. At only $10.09 per share (-6.8% year-to-date), the defensive REIT pays a juicy 8.56% dividend yield.
Reliable monthly dividends
Given the nature of their leasing activities and operations, Dream Industrial and Slate Grocery are reliable income providers. Moreover, the monthly dividend payouts set them apart from other dividend-paying companies.
