It has been a very trying time for REIT (real estate investment trust) investors over the past year. Interest rates have risen faster than most investors ever anticipated. REITs that took on too much variable rate debt have gotten into trouble.
A perfect case study is Northwest Healthcare REIT (TSX:NWH.UN). The company has great long-term healthcare assets. However, it took on too much debt to finance an aggressive and dilutive growth strategy. Now, with its balance sheet weakened, it has cut back its distribution and become a forced seller of several assets.
This is not how you want your real estate investments to turn out. Consequently, investors need to look beyond the dividend yield when approaching REITs.
The key is to find REITs with strong balance sheets, resilient assets, high occupancy, low distribution payout ratios, and good long-term growth prospects. Fortunately, many REITs are extremely cheap. Here are three of my favourite REITs that investors should look at this October.
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A Canadian REIT with top American residential assets
Residential REITs are a good asset to hold in tough economic times. People need shelter and a place to live regardless of the economy. BSR REIT (TSX: HOM.UN) is a particularly resilient asset. Firstly, its garden-style multi-family properties are in some of the top economic and population growth regions in the United States (mainly Texas).
Secondly, it has reasonably priced rents (around $1,500 per month per unit) that should withstand an expected increase in multi-family property supply in 2024.
Thirdly, its debt structure is locked in for the next several years. It has a solid amount of dry powder, which means it can be opportunistic if property valuations correct. In the meantime, BSR is buying back a solid amount of stock.
This REIT pays an attractive 4.4% distribution yield and trades at a ~40% discount to its appraised private market value. This suggests it is an exceptional value today.
Undervalued, essential retail real estate
Another economically resilient real estate stock is First Capital REIT (TSX: FCR.UN). This REIT operates 22.3 million square feet of urban-located retail space.
Its portfolio has one of the highest density ratings amongst its North American peers. This means its properties can expect persistent demand. Over the past 10 years, it has increased leases by an average of ~9% per year.
Over 60% of its tenants are essential service providers (like grocery stores, medical/professional services, restaurant chains, pharmacies, banks, and daycares). This means its properties garner persistent demand.
First Cap has significant excess land and development capacity. Much of this is not valued into the stock price. You can buy this stock for only 58% of its net asset value. That is a massive discount. It also happens to pay a very attractive and sustainable 6.5% distribution that is paid out monthly.
A top Canadian industrial REIT
Dream Industrial REIT (TSX: DIR.UN) operates one of Canada’s largest portfolios of industrial properties. It has 70 million square feet that it either owns or oversees in two joint ventures.
These properties tend to be extremely well-located in top industrial markets (Greater Toronto Region, Montreal, and Calgary). It has over 98% occupancy and robust high-single digit funds from operation (FFO) per unit growth.
Right now, its current average in-place rental rate is 37% below market. That suggests that there is considerable upside in its rents and operating income ahead.
The REIT has relatively low leverage (below 40% net debt-to-assets) and its distribution payout ratio is safely around 70%. This stock yields 5.4% and trades at a 25% discount to its appraised asset value. You will be hard pressed to find private real estate at this quality at such a bargain today.
