Interest rates are falling for the first time in four years. The Bank of Canada (BOC) recently cut policy interest rates by 25 basis points to 4.75%, followed by a similar reduction from the European Central Bank (ECB). It is only a matter of time before the U.S. Federal Reserve and the Bank of England join in, making borrowing more affordable again. Lower interest rates generally favour real estate values, making Canadian assets more appealing. Two top Canadian real estate investment trusts (REITs) particularly appear as undervalued best buys for capital gains and passive-income growth this month: Dream Industrial Real Estate Investment Trust (TSX:DIR.UN) and Granite Real Estate Investment Trust (TSX:GRT.UN).
Dream Industrial REIT: A top Canadian real estate investment for June
Dream Industrial REIT is one of Canada’s largest industrial property managers and one of the most undervalued, high-quality real estate property trusts to consider in June for potential capital appreciation and recurring monthly passive-income streams.
With a market capitalization of $3.5 billion, the top Canadian REIT owns and operates 330 properties comprising 71.8 million square feet of gross leasable area (GLA) located mostly in Canada and Europe, with a growing presence in the United States. Its portfolio enjoys strong occupancy rates of 96.4% going into the second quarter, up 0.2% from December 2023 levels.
Dream REIT’s contracted rents are significantly lower than current market rates, with the trust estimating that market rates were 32% higher than its average portfolio rates as of March 31, 2024. This provides room to raise rentals on new leases, potentially boosting the trust’s cash flow and earnings organically.
Most notably, Dream REIT’s units currently trade at a significant 24.5% discount to their most recent net asset value (NAV) of $16.72. Investors could benefit from capital gains if interest rate cuts and declining bond yields attract capital back into real estate assets.
Additionally, investors in Dream REIT units receive monthly distributions yielding 5.5% annually. The trust paid out a seemingly safe 70% of its funds from operations (FFO) per unit in monthly distributions during the past quarter.
Granite REIT: A solid performer with growth potential
Granite REIT is another industrial property owner poised for organic growth in 2024. Management’s recent plan to repurchase 10% of its outstanding units in May highlights the trust’s potential undervaluation in June 2024.
Granite REIT owns a globally diversified portfolio of 143 investment properties comprising 63.3 million square feet of gross leasable area. An investment in Granite REIT offers stakes in logistics, warehouse, and industrial properties located in Canada, the United States, Germany, the Netherlands, and Austria.
In its first-quarter earnings presentation in May, Granite REIT reiterated expectations for 7% to 8% growth in same-property net operating income (SPNOI) for 2024. The trust’s in-place rents are below average market rents, achieving average rental spreads of 10% above expiring rents during the last quarter.
Growing rents per square foot are a welcome source of organic earnings and cash flow growth at Granite REIT this year. The trust paid out 67% of its adjusted funds from operations (AFFO) in distributions during the first quarter.
Following 13 consecutive years of distribution increases, Granite REIT’s monthly distributions yield 4.9% annually, with management having room to raise payouts in 2025 and beyond.
Granite REIT’s units are increasingly undervalued in June. The trust’s highly experienced and knowledgeable professional real estate managers repurchased units at average prices of $69.39 in May, indicating their belief in the units’ undervaluation. Units traded under $68.40 at the time of writing.
Investor takeaway
As interest rates decline, real estate values are set to rise, making now an opportune time to invest in top Canadian REITs like Dream Industrial REIT and Granite REIT in June. Both trusts offer significant discounts to their net asset values, strong occupancy rates, and well-covered distributions, positioning them as attractive options for investors seeking potential capital appreciation and reliable passive-income streams.
