Companies part of capital-intensive sectors such as real estate, utilities and energy have trailed the broader markets in the last two years due to rising interest rates. As interest rates were on the move, debt-heavy companies struggled with higher interest expenses and narrowing profit margins.
In case inflation is brought under control, there is a good chance for bond yields to move lower in 2024, making quality real estate investment trusts (REITs) the top investment choices right now. Here are two high-yield REITs you can consider buying to benefit from outsized gains over time.
Automotive Properties REIT
Automotive Properties REIT (TSX: APR.UN) owns and acquires income-producing auto dealership properties in Canada. As of September 2023, its portfolio consists of 77 commercial properties, representing 2.9 million square feet of gross leasable area.
The automotive dealership industry in Canada remains highly fragmented, and Automotive Properties expects consolidation to gain pace in the upcoming decade due to growing capital requirements for owner-operators as they pursue economies of scale.
Valued at $542 million by market cap, Automotive Properties offers shareholders a dividend yield of 7.3%. Its triple-net lease structure with fixed and CPI-linked annual increases allows the REIT to generate predictable cash flows and remains positioned to derive same-property net operating income (NOI) growth amid a challenging macro backdrop.
In the third quarter (Q3) of 2023, Automotive Properties reported AFFO (adjusted funds flow from operations) of $0.227 and paid $0.201 per unit in dividends, indicating a payout ratio of 88.5%.
Its rental revenue in Q3 increased by 13% to $23.4 million, up from $20.7 million in the year-ago period. The increases in rental sales were driven on the back of property acquisition and contractual annual rent increases.
In addition to its tasty dividend yield, Automotive Properties trades at a discount of more than 10% to consensus price target estimates.
Dream Industrial REIT
Valued at $3.9 billion by market cap, Dream Industrial (TSX: DIR.UN) is among the largest REITs in Canada. Dream Industrial should benefit from the growing e-commerce market, increasing demand for warehouses as well as storage and distribution centres.
With an annual dividend of $0.70 per share, Dream Industrial offers a forward yield of 5.2%. It owns, manages, and operates a portfolio of 322 industrial assets totalling 70.6 million square feet of gross leasable area in Canada, the U.S., and Europe.
Dream Industrial has returned close to 200% to shareholders in the past decade after adjusting for dividends, outpacing the broader markets by a wide margin.
Its funds from operations per unit in Q3 rose 10.4% year over year to $0.25. Comparatively, it paid shareholders dividends of $0.175 in the September quarter, indicating a payout ratio of 70%. Its comparative properties net operating income stood at $84.6 million in Q3, up from $76.6 million in the year-ago period.
Allied Properties transacted 1.2 million square feet of leases across its portfolio at an average rental rate spread of 41% over prior or expiring rents, indicating strong leasing momentum at attractive rental spreads.
Analysts remain bullish and expect Dream Industrial stock to surge over 17% in the next 12 months.
