Better Real Estate Stock: Allied Properties vs SmartCentres?

Here’s how these two REITs stack up and what I would invest in instead.

| More on:
concept of real estate evaluation

Source: Getty Images

Publicly traded Canadian real estate stocks, especially real estate investment trusts (REITs), have been on shaky ground lately. REITs, which own and manage income-generating properties like office buildings or shopping centers, initially saw a recovery as interest rates began to stabilize.

However, that momentum has largely reversed, thanks to falling property values and a recent shift by the federal government to scale back immigration targets, dampening demand for housing and commercial spaces.

Let me be clear—when it comes to Allied Properties REIT (TSX:AP.UN) or SmartCentres REIT (TSX:SRU.UN), my pick is neither. I think both are suboptimal choices for real estate investments right now.

Here’s my bear case against each of these REITs and, most importantly, a better alternative for investors looking to play the real estate market.

Allied Properties

I’m really not keen on owning some of the most economically sensitive office properties in urban Toronto—and that’s exactly what you’re getting if you invest in AP.UN

To be fair, there are some positives. The REIT’s price-to-adjusted funds from operations (AFFO), a key valuation metric for REITs that measures cash flow available to shareholders, is at 8.4—well below the sector average of 13.14.

The yield is high right now at 10.57%, although that’s mostly because the stock price has fallen so much. Allied’s payout ratio, which measures dividends paid as a percentage of AFFO, sits at 88.7%. While high, it’s still manageable given the REIT’s relatively modest 39.5% debt-to-assets ratio.

The real problem? Occupancy. The return-to-office trend has been sluggish, and Allied’s 87.2% occupancy rate is abysmal for a REIT. Over the past year, AFFO per share has dropped by 6.4%, which raises questions. COVID is over—why aren’t these towers filling up and generating more cash flow?

Right now, Canadian commercial real estate is the last place I want to park my cash. It’s a hard pass on this one.

SmartCentres

Retail REITs can be tricky. Generally, I prefer one with a dominant anchor tenant in a non-cyclical sector—think grocery stores, which tend to perform well regardless of economic conditions.

On the surface, SRU.UN seems to fit the bill. Its largest tenant is Walmart, which accounts for 23% of its rental revenue, and it boasts a strong 98.3% occupancy rate.

Debt metrics look fine, too, with a 42.2% debt-to-assets ratio, and it trades at 11.8 times price-to-funds from operations (FFO)—below the sector average valuation. The payout ratio is a high but manageable 89.8%, which helps support its current yield. So, why not?

The issue lies in growth—or lack thereof. SmartCentres’s FFO per share has been stagnant, with a three-year FFO/share growth rate of -2.3%. This is a red flag for me.

I want a REIT that grows, not one that’s just treading water. To make matters worse, the dividend hasn’t grown either, with a five-year dividend-growth compound annual growth rate of 0%. That’s not the kind of performance I’m looking for in a long-term investment. This one just doesn’t cut it for me.

What to buy instead

Save yourself the trouble, skip both SRU.UN and AP.UN and consider CI Canadian REIT ETF (TSX:RIT) instead.

This actively managed ETF gives you diversified exposure to Canada’s top REITs, spreading out risk across the sector. It can also hold a small portion of its portfolio in U.S. REITs. Funnily enough, the current top 15 holdings don’t include SRU.UN or AP.UN.

With a current distribution yield of 5.3%, RIT has delivered an impressive annualized total return of 8.5% over the last 20 years. It’s a simpler, more balanced way to invest in Canadian real estate without the headaches of picking individual REITs.

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends SmartCentres Real Estate Investment Trust. The Motley Fool has a disclosure policy.

More on Investing

ETF chart stocks
Investing

1 Canadian ETF to Buy and Hold Forever in Your TFSA

This unique ETF provides 1.25 times leveraged exposure to Canadian dividend-growth stocks.

Read more »

top TSX stocks to buy
Metals and Mining Stocks

Trump’s Tariffs: 2 Canadian Stocks That Could Explode in 2025

These two Canadian stocks may not just do well; they could explode under Trump's tariffs.

Read more »

Man data analyze
Dividend Stocks

This 5.3% Dividend Stock Is a No-Brainer as Trump’s Tariffs Hit

This dividend stock offers investors strong income should Canada be hit by Trump's tariffs.

Read more »

ETF chart stocks
Investing

1 “Growthy” Dividend ETF to Buy to Generate Passive Income

This new Canadian dividend-growth ETF is a great alternative to high-yielding stocks.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, February 7

The important labour market reports from the United States and Canada will remain on TSX investors’ radar today.

Read more »

Map of Canada showing connectivity
Dividend Stocks

Trump’s Tariffs: 1 Canadian Stock to Dump and 1 to Buy Immediately

As Trump threatens tariffs on Canada, these are two top stocks to watch.

Read more »

man touches brain to show a good idea
Stock Market

The Smartest TSX Stocks to Buy With $3,000 Right Now

Want some smart TSX stocks that you can safely hold through 2025 and beyond? These three stocks may be worth…

Read more »

bulb idea thinking
Tech Stocks

The Smartest Canadian Stock to Buy With $1,000 Right Now

Strong financials, booming demand for its services, and an expanding presence in AI and cloud computing hardware make Celestica the…

Read more »