The First Home Savings Account (FHSA) is the newest member of the family of tax-sheltered accounts in Canada. As is reflected in its name, the account is for Canadians saving for their first home. The contributions are tax deductible, and if you are withdrawing money for the express purpose of buying your first home, the withdrawals will also be tax deductible.
This account also has other intricacies, like what you can park there. As is the case with Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), you can keep bonds, exchange-traded funds, and Canadian stocks (as well as the U.S. and some other foreign stocks) in the FHSA as well. But a more important question is whether or not a FHSA can trigger a positive momentum in the housing market. If it can, there are a few residential REITs you might consider keeping an eye on.
An overvalued REIT
With an abhorrent price-to-earnings ratio of over 600%, Canadian Apartment Properties REIT (TSX: CAR.UN) is currently one of the most overvalued stocks trading on the TSX. The good news is that it’s not a sign of a major revenue slump.
The revenue, even the gross profit, has been relatively consistent for the past four quarters. The bad news is that it has pushed the payout ratio for its dividends to the highest level in a decade.
Even with a discount of about 23%, the real estate investment trust (REIT) is offering a 3% yield. There are no plans to suspend the dividend (yet), and as one of the largest REITs in the Canadian real estate sector and an Aristocrat, there is a decent probability that the REIT won’t suspend or slash its payouts.
Dividends are the secondary reason to buy this REIT. The primary is its growth, which may see some traction if more people start buying their first home.
A moderately valued REIT
From a valuation perspective, Killam Apartment REIT (TSX: KMP.UN) is a much better buy than Canadian Apartment, even though it doesn’t have the larger REIT’s reach or magnitude. Killam is based in Nova Scotia, and its properties in the province contribute to the largest segment of its net operating income (NOI).
Killam has also diversified to manufactured homes though they still make up a relatively small portion of its portfolio and contribute to only about 6% of its NOI, followed by commercial properties (5%).
The stock was a pretty decent grower up until 2020, and it has been fluctuating since. One benefit of that fluctuation is a price discount and a corresponding hike in the yield, which is currently at 4.1%. Positive market activity may boost its portfolio and trigger a bullish phase for the stock.
An undervalued REIT
Minto Apartment REIT (TSX: MI.UN) has lost about half of its value since the pre-pandemic peak. This has pushed the yield, which is typically low, to a relatively high level of 3.4%. But it’s still not a considerable number considering the type of yields you may find in REITs in general.
Another consequence of this discount is the valuation. With a price-to-earnings ratio of just 2.5, it’s currently one of the most undervalued stocks in the country.
Like most other REITs, Minto showed decent growth before the pandemic, but things have mostly been downhill ever since. The stock may follow a bullish trend again if the real estate market stabilizes and there is a significant rise in the demand for residential units. Its hefty discount may translate into significant recovery-fueled growth.
Foolish takeaway
All three residential REITs offer a similar combination: decent growth potential (in a healthy market) and modest yields, albeit with a relatively consistent payout history. At their discounted prices, all three REITs seem attractive and may be worth considering if the FHSA becomes a positive catalyst for the Canadian housing market.
