Real estate investment trusts, or REITs, have trailed the broader markets in the last two years due to rising interest rates and narrowing profit margins. However, last week, the Bank of Canada lowered borrowing rates by 25 basis points to 4.75% and emphasized that rates might move even lower if inflation is consistently below its 2% threshold.
The lower cost of debt should benefit capital-intensive companies such as REITs that use leverage to fuel their expansion plans. Investing in undervalued REITs should help Canadians generate returns via a steady dividend payout, as well as long-term capital gains. So, here are two top REITs you can buy in June 2024.
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Dream Industrial REIT stock
Down 28% from all-time highs, Dream Industrial REIT (TSX:DIR.UN) pays shareholders an annual dividend of US$0.70 per share, indicating a forward yield of 5.6%. Dream Industrial owns, manages, and operates a portfolio of 330 industrial assets totalling 71.8 million square feet of gross leasable area in key markets across Canada, Europe, and the U.S.
The REIT ended Q1 with an FFO (funds from operations) of US$0.24 per share. Comparatively, it paid shareholders a quarterly dividend of US$0.17 per share, indicating a payout ratio of 70%. A sustainable payout ratio allows Dream Industrial REIT to lower balance sheet debt and target organic growth as well as acquisitions.
In the last four years, Dream Industrial has allocated US$10 billion towards acquisitions, allowing it to build prime assets in core markets and achieve a yield on cost of 7.6%. Moreover, the company is part of a recession-resistant sector and enjoys high occupancy rates across market cycles, resulting in stable cash flow.
In the March quarter, Dream Industrial leased 2.1 million of GLA (gross leasable area) at a 43% spread to prior rents, driven by spreads of 52.4% in Canada and 10.7% in Europe. Dream Industrial stated that more than three million square feet of property rentals will be maturing in Ontario and Quebec, where the average market rent is significantly higher than in-place rent, which should translate to higher cash flows.
Analysts remain bullish on Dream Industrial REIT and expect the stock to surge by 24% in the next 12 months. After adjusting for dividends, total returns may be closer to 30%.
Granite REIT stock
Granite REIT (TSX:GRT.UN) acquires, develops, owns, and manages logistics, warehouses, and industrial properties in North America and Europe. Its portfolio consists of 143 investment properties with 63.3 million square feet of leasable area.
In Q1 2024, Granite reported net operating income of $114.5 million, up from $107.4 million in the year-ago period. The increase in NOI was attributed to the completion of developments and expansion that began in Q1 2023, contractual rent adjustments, inflation-linked increases, and renewal leasing activity.
Granite REIT reported adjusted funds from operations (AFFO) of $77.9 million, or $1.22 per share, in Q1, up from $75.1 million, or $1.18 per share, in the same period last year. Its AFFO payout ratio in Q1 was 67%, which is much lower than that of its peers.
Granite REIT pays shareholders an annual dividend of $3.30 per share, indicating a yield of 4.9%. The stock also trades at a 30% discount to consensus price target estimates.
