Investors could take advantage of a real estate downturn in Canada and lock in some lucrative passive-income yields on real estate investment trusts (REITs) before valuations eventually recover. Real estate markets usually come back roaring to life, and an “easy” $500 per month in passive income can be generated on a low capital investment. Here’s how.
High-yield REIT to buy: Firm Capital Property Trust
Down 22.8% over the past 12 months, Firm Capital Property Trust (TSX: FCD.UN) is a diversified Canadian REIT that has taken a beating during the real estate market downturn. It owns a portfolio of stable growth retail assets, and it’s building a portfolio of multi-residential and manufactured home communities while enjoying growing rental cash flows from its flex industrial real estate properties.
The trust owns the majority of its properties in partnership with its management, board members, and its long-term private capital partners. This insider group owns 51% of Firm Capital’s units. Management’s interests are well aligned with individual investors’ interests.
The REIT has diligently raised its annual distributions since 2012 and remains committed to doing so. However, investors worry that its current distribution, which yields 9.4%, could be unsustainable. Units are priced at a steep 28% discount to their most recent net asset value (NAV) of $7.64 reported for December 31, 2022, and insiders are buying them aggressively.
Insiders acquired 102,805 units over the past six short months, and the trust is repurchasing its undervalued units for cancellation. It has acquired 89,200 units so far this year, and management believes this is a better use of capital with positive long-term yields for remaining investors.
While investor concerns are reasonable, Firm Capital’s portfolio remains formidable.
A formidable REIT portfolio
Firm Capital reported a strong 16% year-over-year growth in net operating income (NOI) during the fourth quarter of 2022. We could see some more growth this year.
The trust’s rentals were far below market rents, and it has room to double them on lease expirations. The REIT generated 26% of its NOI from industrial properties during the past year. It charged an average rent of $7.60 per square foot on industrial properties during the fourth quarter of 2022. A recent CBRE report showed that industrial rents surged by 28.1% to $15.99 per square foot across Canada during the first quarter of 2023.
Further, the REIT enjoys high occupancy rates on its properties. It reported occupancies of 95.9% going into 2023. Strong occupancy generates stable cash flows and liquidity to fund distributions.
Most noteworthy, the trust is investing in higher-earning assets. It grew its multi-residential portfolio by 29% in 2022. Management announced acquisitions of 50% interests in two Ontario manufactured housing communities so far this year. The new property classes have better occupancy rates and better NOI prospects.
How to earn $500 in monthly passive income
Firm Capital has already declared distributions payable until July 2023. Investors could lock in a juicy 9.4% yield if they buy FCD.UN units at current prices. To earn $500 in monthly passive income, one can buy 11,540 units at current prices as shown in the table below:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Firm Capital Property Trust (TSX: FCD.UN) | $5.54 | 11,540 | $0.0433 | $500.02 | Monthly |
Potential risks to consider
Although recent unit repurchases help reduce the burden of future distributions, the trust’s payout rate of its adjusted funds from operations (AFFO) has stayed above 100% for longer than desirable. The REIT’s AFFO payout rate for 2022 was 114%. AFFO measures a REIT’s distributable cash-based earnings, and payout rates above 100% aren’t sustainable.
That said, management is keen on maintaining the trust’s distribution reputation intact, and it’s investing alongside the public, too. Even if the distribution gets cut, a 40% cut will still leave a good 5.6% yield on the table for investors who buy units at today’s high discounts.
The REIT has significant debt maturities in 2024. More than $90 million in debt with an average interest rate close to 3.5% will mature within the following year. Refinancing may not be a problem, but interest costs will rise for sure. That said, interest rate hikes have taken a breather, and investors have little to worry about, as rates may stall at current levels in the near term.
