Passive Income: 2 REITs to Play Lower Rates

Two prominent REITs are top plays for passive income investors before or once rate cuts begin.

| More on:
Community homes

Image source: Getty Images

The Bank of Canada raised its policy rate nine times from March 2022 to July 2023, for a cumulative increase of 4.75% from 0.5% in February 2022. Since July 2023 to the present, the central bank has kept the rate at 5%. Some sectors benefit from rising interest rates, but it hurts real estate the most.

Canada’s housing market was red hot before rate hikes. Fortunately, it cooled but did not crash when the Feds’ tightened their monetary policy. Still, prospective homebuyers and sellers stayed on the sidelines for apparent reasons – higher borrowing costs and declining prices. Real estate investors avoided the unstable market.

However, the market dynamics could change for the better soon, especially for real estate investment trusts (REITs). Industry analysts believe a bounce back is possible in 2024 when rate cuts begin. For dividend investors, residential and industrial REITs are the top plays in a low-rate environment.

Killam Apartment (TSX:KMP.UN) and Nexus Industrial (TSX:NXR.UN) have been steady amid massive headwinds and should do better as interest rates recede. More importantly, expect consistent and generous monthly passive income streams.

Rental over purchase

Killam Apartment is one of Canada’s established institutional landlords in the residential sub-sector. This $2.25 billion growth-oriented REIT owns and operates apartments (18,835 units) and manufactured home communities, or MHCs (5,975 sites), in Atlantic Canada, Ontario, Alberta and British Columbia.

Demand for rentals rose because of more expensive mortgages and reduced affordability. The Bank of Canada also said the high interest rate would or must stay longer. Meanwhile, Killam continues to develop and expand its portfolio to keep up with demand. The REIT is also divesting from slower markets.

Around 57% of Killam’s net operating income (NOI) is under provincial rent control. Nonetheless, in 2023, property revenue and NOI increased 5.9% and 8.3% year over year respectively to $348.1 million and $224 million. Because of fair value gains on investment properties, net income rose 117% to $266.3 million from a year ago. At year-end 2023, same-property apartment occupancy was 98.5%.

Killam expects further rental rate growth in 2024. Its president and CEO, Philip Fraser, adds the development pipeline should contribute to future earnings growth and alleviate the housing supply shortage. If you invest today, the real estate stock trades at $19 per share (+6.44% year to date) and pays a 3.64% dividend.

Favoured asset class

Nexus Industrial owns office and retail properties, but its portfolio is predominantly industrial (73.5%). The $726.9 million REIT changed its corporate name to Nexus Industrial REIT in January 2022 to reflect its goal of becoming a pure-play industrial REIT. At $7.75 per share, current investors partake in the 8.08% dividend.

Management will present the Q4 and full-year 2023 results this week, although the figures after three quarters were impressive. In the nine months ending September 30, 2023, property revenues, NOI, and net income rose 15%, 17%, and 15% year over year to $115.6 million, $82.7 million, and $157.9 million, respectively.

According to Nexus CEO Kelly Hanczyk, the industrial sector is a favoured asset class. It remains stable, notwithstanding market uncertainty and a heightened interest rate environment.

Invest for passive income

REITs are the next best alternatives to owning investment properties. And if you’re investing for passive income, your money is safe with Killam Apartments or Nexus Industrial.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Killam Apartment REIT. The Motley Fool recommends Nexus Industrial REIT. The Motley Fool has a disclosure policy.

More on Dividend Stocks

hand using ATM
Dividend Stocks

Should Bank of Nova Scotia or Enbridge Stock Be on Your Buy List Today?

These TSX dividend stocks trade way below their 2022 highs. Is one now undervalued?

Read more »

A meter measures energy use.
Dividend Stocks

Here’s Why Canadian Utilities Is a No-Brainer Dividend Stock

Canadian Utilities stock is down 23% in the last year. Even if it wasn’t down, it is a dividend stock…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

Got $5,000? Buy and Hold These 3 Value Stocks for Years

These essential and valuable value stocks are the perfect addition to any portfolio, especially if you have $5,000 you want…

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »

grow money, wealth build
Dividend Stocks

1 Growth Stock Down 24% to Buy Right Now

With this impressive growth stock trading more than 20% off its high, it's the perfect stock to buy right now…

Read more »

Dividend Stocks

What Should Investors Watch in Aecon Stock’s Earnings Report?

Aecon (TSX:ARE) stock has earnings coming out this week, and after disappointing fourth-quarter results, this is what investors should watch.

Read more »

Freight Train
Dividend Stocks

CNR Stock: Can the Top Stock Keep it Up?

CNR (TSX:CNR) stock has had a pretty crazy last few years, but after a strong fourth quarter, can the top…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Stocks Ready for Dividend Hikes in 2024

These top TSX dividend stocks should boost their distributions this year.

Read more »