Passive Income: 2 REITs to Play Lower Rates

Killam Apartment REIT (TSX:KMP.UN) specializes in the East Coast market, where borrowers aren’t as stressed as they are in Ontario and B.C.

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Do you expect interest rates to come down in the next year? If you do, real estate investment trusts (REITs) might be good assets to add to your portfolio. Heavily leveraged, they profit when rates fall. In this article, I will explore two REITs that could be good portfolio additions in 2024.


RioCan Real Estate Investment Trust (TSX:REI.UN) is one of Canada’s largest REITs. It offers both residential and retail units. Its properties tend to have stable “anchor tenants” such as Loblaw, Winners, and Dollarama. For this reason, the REIT’s portfolio has a very healthy 98.4% occupancy rate.

RioCan has taken some hits in recent years. During the COVID-19 pandemic, many of the company’s tenants were forced to close down. That resulted in some rent deferrals; tenants probably would have defaulted had they not been issued. After that, the REIT saw its variable-rate debt become more expensive due to the Bank of Canada’s 2022/2023 rate-hiking spree.

It was a tough time, but today, RioCan is back to business as usual. In its most recent quarter, it delivered $139.2 million in revenue, up 4.5%, and $0.44 in funds from operations (FFO) per share. All in all, it was a pretty good showing, and FFO will likely improve even more if rates come down. Obviously, the growth was not off the charts, but REI.UN is a value stock trading at just 11.5 times earnings, with a 6.2% dividend yield. I’d say investors are getting a decent value for what they’re paying here.

Killam Properties

Killam Apartment REIT (TSX:KMP.UN) is a Canadian REIT that specializes in the Atlantic Canada market. The REIT’s geographic focus is an advantage in several ways:

  • Halifax, the largest Atlantic real estate market, has a low level of mortgage debt and consumer debt. This may portend a low default rate on Halifax real estate portfolios going forward.
  • Nova Scotia properties are rising in price thanks to people migrating from Ontario to Halifax.
  • New Brunswick and Newfoundland have some of the lowest housing costs in the country and plenty of room to grow.
  • St. John’s has some of the lowest property tax rates among Canadian cities.

The downside of Newfoundland and New Brunswick being “cheap” is that Killam’s properties there don’t see as much appreciation as those in Ontario. Nova Scotia is seeing significant price appreciation. So, the Atlantic market as a whole could be a good one.

Killam’s portfolio consists mainly of residential apartment buildings. A few years ago, it spent money renovating its St. John’s apartments to make them more attractive. As part of my research for this article, I looked at rent at these apartments. It does not appear that they have increased in price very much, but they do look much more attractive than they did a decade ago. Killam also branched out into offering hotel-like, short-term stays at these apartments.

KPM’s revenue and earnings increased over the trailing last one-, five- and 10-year periods. These are above-average growth metrics for a REIT in the age of COVID and rising interest rates. Despite this fact, Killam trades at a modest 15 times FFO. It looks like a decent value.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Killam Apartment REIT. The Motley Fool has a disclosure policy.

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