Top 2 REITs to Buy Before Yields Fall Along With Interest Rates

Canadian Apartment Properties REIT (TSX:CAR.UN) is just one REIT that could gain when rates really start to tumble.

| More on:
View of high rise corporate buildings in the financial district of Toronto, Canada

Source: Getty Images

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).

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Killam Apartment REIT. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Family relationship with bond and care
Dividend Stocks

Invest in These TSX Stocks Now and Retire With Peace of Mind

Canadian stocks like Brookfield Asset Management (TSX:BAM) offer long term investment potential.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Passive Income: 4 Stocks to Buy and Never Sell

These four TSX dividend stocks could boost your passive income.

Read more »

growing plant shoots on stacked coins
Dividend Stocks

2 Risky Dividend Stocks to Avoid (and 2 Safe Ones)

Looking for dividend income? Here are two stocks to avoid and two stocks to readily buy for safe and steady…

Read more »

question marks written reminders tickets
Dividend Stocks

Is Telus Stock the Best High-Yield Dividend for You? 

Would you invest in a stock that gives a 7% yield or a 22% yield? Telus is a high-yield stock…

Read more »

exchange-traded funds
Dividend Stocks

2 Canadian ETFs to Buy and Hold Forever in Your TFSA

Both of these Vanguard ETFs pay monthly dividends from Canadian stocks.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Income: 3 Canadian Dividend Stocks to Hold for a Lifetime

Looking for passive income that lasts? These three dividend stocks offer some of the best long-term growth opportunities, and dividends…

Read more »

A colourful firework display
Dividend Stocks

2 Potentially Explosive Stocks to Buy in July

Just because a company is a blue-chip TSX stock, doesn't mean the growth is all but over. In fact, these…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Stocks Set for Dividend Increases This Year

Dividend-growth stocks offer a great mix of income and capital upside. Here are three stocks for more dividend growth ahead.

Read more »