Real estate investment trusts (REITs) might be one of the cheapest asset classes you can find on the Canadian market today. However, REIT investors need to be cautious. Not all REITs are equal. REITs tend to utilize a lot of debt to finance the heavy costs of owning land and buildings.
Beware of debt and certain asset classes
Unfortunately, when interest rates rise so quickly (like they have), REITs with too much variable rate debt get caught in a cash crunch. Already, a few public and private REITs have had to halt or halve their distributions.
Likewise, just because a REIT is cheap does not always make it a good investment. Certain asset classes, like office, are just not investable given the secular shift toward a hybrid work model.
Rather, I like to focus on REITs that are well-located, have strong balance sheets, long-term fundamentals supporting growth, and that trade with attractive valuations. Here are three of the top Canadian REITs to buy in May 2023.
A growing industrial REIT
One of my favourite industrial REITs is Dream Industrial REIT (TSX: DIR.UN). Interestingly enough, this stock is up 25% in 2023. With a market cap of $4 billion, it is the second-largest industrial REIT in Canada. It owns and manages over 320 industrial properties across Canada, the U.S., and Europe.
It just announced strong first-quarter results where funds from operation (FFO) per unit increased 13% to $0.25. Dream maintained very high 98.6% occupancy. Further, it saw a 41% increase on new rental rates across one million square feet of its portfolio. It still has significant upside from its portfolio just rising to market rental rates.
Today, this REIT yields 4.7%. Its distribution is very well supported. Despite the strong recovery in its stock, Dream still trades at 14% discount to its private market value. This suggests there is still some upside in the stock from here.
A top TSX multi-family stock
Another Canadian REIT that looks very attractive is BSR REIT (TSX: HOM.U). While it is a Canadian REIT, all its assets are in the southern United States. BSR owns and operates 31 garden style multi-family communities across Arkansas, Oklahoma, and Texas.
BSR’s properties are very well located in fast-growing jurisdictions. Last year, its average monthly rental rate grew 11.7%. Yet its average monthly rent of $1,500 remains very reasonable for its amenity rich properties. BSR has a strong balance sheet with its debt largely locked in for the next several years.
BSR stock yields 4% right now. Unlike Dream, its stock is down around 1.4% this year. Yet it presents a very good bargain given that it trades at only 60% of its private market value.
A grocery-anchored REIT at a huge discount
First Capital REIT (TSX: FCR.UN) is a unique value opportunity in Canada. It has 22.3 million square feet of some of the best-located grocery-anchored retail properties in Canada. In fact, 45% of its annualized rent comes from essential goods and services providers.
The company owns significant land assets with excess development potential. Recently, some activists got involved and are starting to stir the pot to help unlock value. While there are no immediate catalysts, First Capital generates steady income and should see some upside as the market recognizes the value of its developments.
This stock yields 5.5% today. It trades at 33% discount to its net asset value, so there is certainly a margin of safety when buying this stock today.
