Several real estate investment trusts, or REITs, have trailed the broader markets in the last two years due to rising interest rates and a sluggish macro environment. Typically, REITs fuel their expansion plans with debt, and higher interest rates have acted as massive headwinds for capital-intensive companies in recent quarters.
Due to a high payout ratio and rising debt costs, Canadian REITs such as Northwest Healthcare were forced to cut their dividends last year. However, as interest rates are expected to move lower in 2024, profit margins for REITs should expand in the following 12 months.
Given these factors, let’s see which top Canadian REITs you can buy in January 2024.
Automotive Properties REIT stock
Valued at $528 million by market cap, Automotive Properties (TSX: APR.UN) stock is down 28% from all-time highs. But the drawdown in share prices has increased the REITs yield to a tasty 7.5%.
Automotive Properties owns and operates a portfolio of automotive dealerships and represents brands ranging from mass market to ultra-luxury. With annual sales of $188 billion in 2022, the Canadian automotive retail industry accounted for 25% of the country’s total retail sales. Moreover, the industry has a track record of strong sales and profit margins, allowing Automotive Properties to report stable cash flows across market cycles.
Automotive Properties has 77 income-producing properties with 2.9 million square feet of gross leasable area. With an average lease term of 10.1 years, the REIT enters triple-net lease agreements with its tenants. It means tenants will be responsible for costs related to repairs, maintenance, taxes, insurance, utilities, and non-structural capital improvements.
Further, the majority of the property leases include fixed rent escalators shielding the REIT from inflation and rising costs.
Automotive Properties pays shareholders a monthly dividend of $0.067 per share. After adjusting for dividends, Automotive Properties stock has returned 100% to shareholders since its IPO, or initial public offering, in September 2015.
Allied Properties REIT stock
Allied Properties (TSX: AP.UN) is an owner and operator of urban workspaces in major Canadian cities. It aims to provide knowledge-based organizations with workspaces conducive to human wellness and creativity.
Allied Properties went public more than 20 years back, growing its asset base from $128 million to $11.3 billion in this period, indicating a compound annual growth rate of 24.4%. This expansion in its asset base has allowed the REIT to grow its annual distribution from $1.14 per share in 2004 to $1.80 per share in 2023.
After adjusting for dividends, the Allied Properties stock has returned 334% to shareholders since January 2004, compared to the TSX returns of 318.6%.
Allied Properties explained that knowledge-based organizations prefer distinctive workspaces in “amenity-rich” neighbourhoods in major Canadian cities, raising demand for its workspaces across the country.
In the third quarter (Q3), Allied conducted 306 lease tours in its rental portfolio, up from 292 in the year-ago period, despite slower leasing activity in the summer months.
In Q3 of 2023, Allied Properties reported an adjusted funds flow from operations of $0.545 per share, up from $0.536 per share in the year-ago period. It suggests the REIT has a payout ratio of 75.3% in Q3, lower than its year-ago ratio of 82.6%.
