Canadian real estate investment trusts (REITs) haven’t been the best investments over the last 10 years. iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) is down over the trailing one-, five-, and 10-year timeframes. It is up since its inception in 2002, but not by much. On the whole, Canadian REITs have been underperforming — at least insofar as XRE is a good proxy for the sector.
The good news is that Canadian REIT returns with dividends included have been reasonably good. REITs usually pay high dividends, and Canadian REITs offer particularly high yields when compared to U.S. ones. When I pulled up the historical dividend data on XRE, I noticed that the fund paid $9.21 in dividends in the 10-year period ended December 2023, which was far more than the -$1.56 price decline observed in the same period. I calculated that the compounded annual growth rate Canadian REITs (again, assuming that XRE fairly represents the sector) was 3.94%. The high dividend income was enough to offset the persistent capital losses.
All that being said, if you’re going to invest in Canadian REITs, you probably want to pick the best of the pack. It would appear that, as a group, they have some duds among them. In this article, I will explore two top Canadian REITs to buy in April 2024.
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Killam Apartment REIT
Killam Apartment REIT (TSX: KMP.UN) is a Canadian REIT that focuses on the East Coast market. This market has many unique opportunities. Nova Scotia has seen very high price appreciation in the last five years. If this persists then KMP should see some fair value gains on its portfolio. Fair-value gains don’t directly influence a REIT’s dividend-paying ability, but they do tend to indicate that a REIT will collect more income than it paid for a building should it choose to sell one. In the Newfoundland market, prices and property taxes are generally low, so properties can be acquired more cheaply there, and be operated at low tax rates.
KMP has a pretty good balance sheet for a REIT. It has a 0.88 debt-to-equity ratio, meaning its debt is less than the value of what it owns net of debt. That’s pretty good for a REIT, as REITs have to pass the vast majority of their profit on to shareholders as dividends. The REIT also has positive growth in funds from operations (FFO) over the trailing one-, three-, and five-year periods. These metrics are above average.
Granite
Next up, we have Granite Real Estate Investment Trust (TSX: GRT.UN). This REIT invests in logistics, warehouse and industrial property. It operates in Canada, the U.S., Germany, the Netherlands, and Austria. It has valuable tenants, including DHL, Wayfair and The Home Depot. The Home Depot, in particular, is a very stable, reliable, resilient company, whose stores tend to be very successful, even in markets where the economy isn’t that great.
These advantages are reflected in Granite REIT’s operating performance. It has double-digit revenue growth over the last three and five years and positive FFO growth over the same timeframes. Its debt-to-equity ratio is a mere 58%, which is better than average for the highly leveraged REIT sector.
