Canadian real estate investment trusts (REITs) are an excellent way to invest in real estate passively. The idea is that you’ll get paid monthly income while you wait for price appreciation. At the same time, investors need to treat Canadian REITs like stocks. The stock prices are bound to go up and down, sometimes creating excitement and other times stirring fear.
Since 2022, interest rates have gone up, pressuring stock valuations, including triggering a selloff in Canadian REITs. Here are a couple of top Canadian REITs that investors can consider buying at a discount today. Notably, it’s possible that the REITs will continue to be weighed down until we are in a new interest rate-cutting cycle.
Residential REIT stock trading at a discount
Residential REITs tend to command a premium valuation because of the defensive nature of their assets. Everyone needs a place to live. If they don’t own the place they live in, they must rent.
InterRent REIT (TSX: IIP.UN) is a multi-family residential REIT that owns, manages, and develops homes in four core regions — the Greater Toronto and Hamilton Area, the Greater Montreal Area, the National Capital Region, and the Greater Vancouver Area — totaling about 13,907 suites.
Particularly, InterRent REIT commands a long-term normal valuation of about 23.4 times funds from operations (FFO). This is not surprising seeing as it delivered double the industry growth in revenue and net operating income (NOI) over the past 10 years. Specifically, its revenue and NOI growth rate in the period was 14.7% and 15.8%, respectively, versus the peer average of 7.1% and 7.6%.
At about $12 per unit at writing, the stock is down more than 17% from its 52-week high, putting it at a discount of roughly 10% from its long-term normal valuation. Analysts think it trades at an even bigger discount of 19% with a 12-month price target of $14.81. The stock also offers a safe cash-distribution yield of close to 3.2%.
Industrial REIT stock also on sale
Industrial REITs are another defensive slice of the real estate sector. Unlike other areas of the market that may be experiencing no growth with the weight of higher interest expense, this industrial REIT is set for growth.
Particularly, Dream Industrial REIT (TSX: DIR.UN) continues to enjoy a high occupancy of about 96%. Demand is strong for its properties as the market rent is 30% higher than its in-place rent. It means that, for example, when it’s signing a new tenant to replace an old one, it would be able to get higher rental income. Importantly, its balance sheet is also conservative, with a net debt-to-asset ratio of about 36%, providing financial flexibility to grow its portfolio.
At about $12.80 per unit at writing, the stock has fallen more than 12% from its 52-week high. At this quotation, analysts think it offers a meaningful discount of 20% from the consensus target of $16.07. The stock also offers a cash distribution yield of almost 5.5%, which is quite desirable and sustainable, with a payout ratio of about 69% of its FFO this year.
