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.

Created with Highcharts 11.4.3SmartCentres Real Estate Investment Trust + Allied Properties Real Estate Investment Trust PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

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.

Created with Highcharts 11.4.3Ci Canadian REIT ETF PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

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

An investor uses a tablet
Stocks for Beginners

The Smartest Canadian Stock to Buy With $250 Right Now

Are you looking for the smartest Canadian stock to buy right now? Consider this gem and avoid market volatility.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

Electricity transmission towers with orange glowing wires against night sky
Investing

Fortis Just Might Be the Best Canadian Dividend Stock to Buy in April

Let's dive into a few reasons why Canadian utility giant Fortis (TSX:FTS) still looks like a screaming buy heading into…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

How I’d Allocate $10,000 to AI Stocks in Today’s Market

Shopify (TSX:SHOP) is one of Canada's most compelling AI stocks.

Read more »

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

Top Canadian Value Stocks I’d Hold in My TFSA for the Next Decade

These Canadian value stocks have significant growth potential and will enhance your TFSA portfolio’s return in the long run.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »