The introduction of Canadian real estate investment trusts (REITs) in 1993 was a monumental financial engineering marvel that minted a new asset class. It afforded ordinary individuals cheap access to usually reliable rental income and exposure to the long-term capital-appreciation potential of Canadian real estate without the nagging hassles associated with direct property ownership.
Canadian REITs remain a proven source of generally reliable monthly income distributions and a source of long-term capital gains despite a steep drop in 2022 when a diversified iShares S&P/TSX Capped REIT Index ETF generated a 17.4% annual loss. Volatility happens in the asset class, too. Rising borrowing costs and higher discount rates drag REIT valuations down.
Regardless, Canadian REITs’ income-generating potential generally remains robust, and some individual REITs are Dividend Aristocrats that cultivated a strong track record of raising their distributions every year while growing investors’ capital.
Investors just have to navigate the REIT world as carefully as they do in other asset classes.
The best Canadian REIT industries to buy in 2024
Average yields and total returns on Canadian REITs may vary widely by property type over the next year.
Industrial REITs enjoyed full occupancy rates, fast rent growth rates and high property valuations as businesses rushed to bring back their supply chains onshore post COVID-19. Valuations may slightly correct as growing supply leads to lower occupancy rates in 2024. Residential REITs usually enjoy robust demand from a growing tenant base as the population grows and housing affordability declines. Retail property occupancy rates should continue recovering well.
Unfortunately, highly leveraged and beaten-down office REITs may remain under severe pressure in 2024, as occupancy rates continue to decline after companies fell for the allure of work-from-home flexibility.
Evidently, not all REITs are the same. It’s imperative that one navigates the Canadian REIT world carefully to find dividend gems in the Canadian real estate sector, unlock capital gains, and limit the potential of buying into a struggling trust that may cut its distributions as its sustainable distributable cash flows (usually measured by adjusted funds from operations (AFFO)) dwindle.
Two dividend gems in the Canadian real estate sector to buy 2024
The most appealing attribute of Canadian REITs is their monthly distributions, especially if payouts are well supported by recurring distributable cash flow. Trusts with low AFFO payout rates below 90%, strong or rising occupancy levels, growing net operating incomes (NOI), and low leverage should do well next year.
CT Real Estate Investment Trust (TSX:CRT.UN) is a favourite Dividend Aristocrat that has been a strong performer on both the distribution growth and the capital gains front since going public 10 years ago. It currently pays a distribution that yields 6.2% annually.
The retail property trust boasts a 99.1% in-place occupancy rate; its key tenant, Canadian Tire remains an ambitious, steady-growth, financially healthy retailer that’s still expanding its geographical footprint across Canada (and thus demanding more retail space), and the trust pays one of the most covered distributions going into 2024.
CT REIT reduced its AFFO payout rate from 95% a decade ago to 73.2% by September 2023. Net operating income has galloped ahead at rates above 7% annually, and AFFO per unit growth rates have averaged an impressive 5.7% annually since 2013.
After 10 years of consecutive annual distribution raises, the trust’s monthly distribution yields 6.2% annually, and there’s room for more payout growth given income growth and manageable payout rates.
CAPREIT to remain formidable in 2024
Canadian Apartment Properties Real Estate Investment Trust (TSX:CAR.UN) , or CAPREIT, is another dividend gem in the Canadian real estate sector worth your investment in 2024. The residential REIT holds about 64,500 residential property units located in Canada and the Netherlands and has cultivated a strong 11-year dividend-growth streak.
CAPREIT’s monthly distributions look well covered. The trust paid out 60.5% of its funds from operations (FFO) during the first nine months of 2023 — an improvement from an FFO payout rate of 62% a year ago. Distributions from the $16.5 billion property portfolio currently yield 3% annually.
Leverage looks okay at a 41% debt ratio. Units trade at a discount of 10% to the trust’s most recent net asset value estimate of $54.36 per unit reported at the end of September 2023.
