Real estate investment trusts (REITs) are alternative income sources of Tax-Free Savings Account (TFSA) investors besides traditional dividend stocks. While rising interest rates have weighed down the real estate sector, top Canadian REITs like Dream Industrial (TSX:DIR.UN) and NorthWest Healthcare Properties (TSX:NWH.UN) remain reliable passive-income providers.
The REITs belong to different real estate sub-sectors, but both pay high dividends. Moreover, the payout frequency is monthly so that a TFSA investor can augment active or regular income with tax-free dividends from either REIT.
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Pure-play industrial REIT
Dream Industrial owns, manages, and operates a portfolio of industrial assets (321 properties) in key Canadian, U.S., and European markets. The pure-play industrial REIT generates stable, long-term cash flows from high-quality industrial properties in high demand. Current unitholders enjoy a 12.9% year-to-date gain ($12.71 per share) in addition to the juicy 5.51% dividend yield.
The $3.57 billion REIT has a dedicated team responsible for sourcing attractive industrial assets in markets with strong operating fundamentals. As part of its portfolio optimization strategy, the Dream team regularly evaluates and benchmarks each asset in the portfolio. They assess the historical and future performance and identify opportunities to recycle the assets.
As of June 30, 2023, the occupancy rate (in-place and committed) is 98%, while the weighted average lease term is 4.4 years. In the second quarter (Q2) of 2023, net rental income increased 20.82% to $83 million versus Q2 2022, indicating a productive, positive quarter and robust leasing momentum.
On a year-to-date basis (first half of 2023), net rental income climbed 22.72% to $164.5 million compared to a year ago. Dream Industrial’s balance sheet remained strong at the end of the period and had an available liquidity of approximately $243 million. Management said the REIT is well-advanced in preparing to refinance maturing European mortgages.
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Because rents are ever-increasing across its operating markets, Dream Industrial expects stronger rental rate growth over time. The REIT will likewise set rents on expiring leases to market. At the close of the first half of 2023, the estimated market rents exceeded the average in-place base rent across the portfolio by over 37%.
Only REIT in the cure sector
NorthWest Healthcare Properties has underperformed (46.41% year-to-date loss) thus far in 2023, but the mouth-watering dividend yield compensates for the depressed share price. At $4.73 per share, you can partake in the 7.21% dividend yield. Assuming you use your 2023 TFSA limit ($6,500) to purchase the REIT, you will generate $39.05 tax-free monthly income.
You’d be investing in the only REIT in the cure sector. This $1.15 billion REIT owns and manages a portfolio of high-quality properties in eight countries. NorthWest focuses on tenants in healthcare, research, life sciences, and education.
Despite the $107.4 million net loss in Q2 2023, Northwest remains stable and resilient amid rising interest rates and inflation. The portfolio occupancy rate is 96%, while the weighted average lease expiry is 13.5 years.
Sub-sector pillars
Dream Industrial and NorthWest Healthcare are pillars in their respective sub-sectors. However, the former has better fundamentals in the current environment. It also has new sources of growth capital through a joint venture (JV). The JV will enable the REIT to pursue strategic acquisitions and boost property management and leasing fee streams.
