The U.S. Federal Reserve seems to be hinting at a trio of rate cuts for the new year. As such cuts become (partially) priced into broader markets, there’s a real risk that investors may be left disappointed if anything less than three cuts are in the cards for 2024.
Undoubtedly, it’s really hard to gauge what the Fed (or even the Bank of Canada) will do next. It’s tough to know what they’re thinking as the economic data comes slowly trickling in. Either way, the market seems to have put inflation (mostly) behind it, with more emphasis on a potential return to lower rates.
As the economy wobbles around, the Bank of Canada may be inclined to follow in the footsteps of the Fed. For now, the Bank of Canada seems just a tad further away from committing to a cut. As rates pause here in Canada while they begin to backtrack in the States, the Canadian dollar may finally gain a bit of ground against the U.S. dollar.
In any case, investors should focus less on Fed rate cuts and more on the longer-term trajectory. Are rates destined to be lower from here? Probably. But it’s the pace of cuts that could dictate how markets react moving forward. Even if rates are on a slow descent, there are plenty of rate-sensitive securities that could be in a spot to march higher.
Take the Real Estate Investment Trusts (REITs) as one asset class that welcomes a peak in rates with open arms.
Without further ado, let’s check out two impressive higher-yielding REITs that I think could have a good year in 2024 as rates finally cool and the Bank of Canada looks to take a dovish turn of its own (perhaps a Canadian recession could do it!).
Killam Apartment REIT
Up first, we have Killam Apartment REIT (TSX: KMP.UN), a growth-focused residential property play with a good chunk of exposure in Atlantic Canada. Indeed, the Atlantic coast may be overlooked as the Vancouver and Toronto rental markets really heat up.
Though Killam isn’t an Atlantic property pure-play, I do think shares are looking quite cheap relative to the high-quality income-producing assets you’re getting. Shares go for around $17 and change per share at the time of writing.
Since bottoming back in October, shares are up around 16%. The yield isn’t all too rich at 3.91%, but as a growth-focused REIT, I do view the distribution as bountiful for young investors looking to find a good balance between income and long-term appreciation. Killam’s one of my top value REIT picks for December 2023.
SmartCentres REIT
SmartCentres REIT (TSX: SRU.UN) is hands down my favourite retail REIT, and perhaps my top yield heavyweight (shares yield just over 7.5% at writing) in the space.
Undoubtedly, the AFFO payout ratio may have crept higher in recent years. But it’s still not high enough to be worried about the safety of the distribution. In fact, I’d argue the AFFO payout ratio could move a lot lower from here as rates cool and the economy gets a chance to recover from the past few years of subtle headwinds.
In any case, I’m a fan of the REIT’s tenant base (many are some of the more resilient brick-and-mortar retailers out there) and their ability to keep making rent in a mild recession year. And if that recession never materializes? Look for SRU.UN to correct to the upside, as it attempts to climb back above the $30 level.
