The following real estate investment trusts (REITs) look like fantastic bets for passive income investors seeking to position ahead of what could be a return to a lower-rate environment. While I’m not calling for a return of near-zero rates, I do think that any “break” on rates could provide a considerable tailwind for the yield-heavy, rate-sensitive REITs, many of which are currently trading at dirt-cheap multiples. Such discounts may not last for very long, especially if inflation gives the Bank of Canada enough room to get a bit more dovish in the final quarter of the year.
Though I have no idea if REITs will skyrocket once rates really start moving lower, I do like the valuations I’m seeing today, and the healthy, swollen yields on distributions of some of the names. Simply put, the REITs continue to be unloved by Canadians.
For contrarian investors, this distaste for the REITs could provide a window to buy them at a great deal. As always, I’d much rather hold such high-yielders for the long haul rather than seek to score a quick gain. After all, why would you want to ditch shares of a firm with such juicy distribution yields?
Consider shares of Canadian Apartment Properties REIT (TSX:CAR.UN) and Killam Apartment REIT (TSX:KMP.UN).
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Canadian Apartment Properties REIT
Canadian Apartment Properties REIT is a growth-centric property play that may find itself flirting with multi-year lows again. Today, shares are going for $43 and change, up a mere 6% from multi-year depths faced in the midst of 2022. Undoubtedly, high rates have been a pronounced headwind, not just for CAPREIT but the entire asset class. As a growthier REIT, which spends a great deal to expand its portfolio of residential properties, the higher rates have been felt just a bit harder.
Though rate relief may be in sight, I’m unsure when CAR.UN will start moving higher again. Given the high degree of volatility from the stock (1.2 beta, which implies more market risk), I wouldn’t be shocked if shares were to spike suddenly going into year’s end.
Though oversold and undervalued, I just don’t know when Mr. Market will correct his mistake to the upside. Either way, you’re getting a 3.3% yield to hold onto what could be one of the best-run residential REITs in Canada right now.
Killam REIT
Killam Apartment REIT is another great residential REIT that’s felt the heat of high rates. The shares are currently down 27% from their 2021 peak levels.
With a nice 4% yield and a solid track record of expanding and renovating, I wouldn’t give up on the REIT just because times have been tougher lately. Indeed, some of the development projects on the Atlantic coast could be the source of considerable funds from operations (FFO) growth and lead to a nice distribution hike down the road.
With the balance sheet on steady footing, perhaps KMP.UN shares stand out as a more intriguing buy than CAPREIT for investors looking to buy the wreck in the REIT scene.
