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:

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.

concept of real estate evaluation

Source: Getty Images

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.

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

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

3 of the Best Canadian Stocks to Buy and Hold in a TFSA

Given their reliable business models, consistent financials, and healthy growth prospects, these three Canadian stocks are ideal additions to your…

Read more »

woman checks off all the boxes
Dividend Stocks

What Every Investor Should Know Before Buying BCE for its Dividend

BCE (TSX:BCE) stock looks like an untimely trap, but there's a strong case for buying as the firm looks to…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

2 TSX Dividend Stocks Retirees Can Buy and Hold for the Next Decade

These dividend stocks provide the right mix of growth, income, and stability for the long term.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

3 Stocks to Build a Strong Canadian Income Portfolio

While no dividend is guaranteed, these companies have shown their ability to generate resilient cash flows and return capital.

Read more »

stocks climbing green bull market
Dividend Stocks

2 High-Yield Dividend Stocks to Buy and Hold for a Decade of Income

With resilient business models, reliable cash flows, high yields, and healthy growth prospects, these two Canadian stocks are ideal for…

Read more »

3 colorful arrows racing straight up on a black background.
Investing

Buy the Dip: 3 Stocks to Buy Today and Hold for the Next 5 Years

These stocks are under pressure, but should be solid dividend picks over the medium term.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

I’d Put My Whole 2026 TFSA Contribution Into this 5.5% Passive-Income Payer

This passive-income payer has raised its dividend every year since 1995. Moreover, it has room to increase its dividend in…

Read more »

dividends grow over time
Dividend Stocks

$10,000 Invested at 8% for 20 Years Could Become $46,610

$10,000 doesn’t need perfect timing to become meaningful wealth — it mainly needs time and compounding.

Read more »