Canadian real estate investment trusts (REITs) offer a simple way to earn regular passive income while investing in property markets. However, choosing which REIT to buy between one that pays a 6% yield and another that touts a 10.4% distribution yield isn’t as easy as it should be. For Canadian investors, the choice between RioCan Real Estate Investment Trust (TSX: REI.UN) and Allied Properties Real Estate Investment Trust (TSX: AP.UN) is especially challenging. Both deliver monthly payouts, but their differences in yields, earnings quality, financial stability, and growth potential make this a decision worth careful consideration. Here’s what you need to know to make an informed investment choice for your dividend portfolio.
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RioCan REIT: Stability and growth in retail and residential real estate
RioCan REIT primarily invests in retail properties, with a portfolio of 186 properties comprising over 33 million square feet of gross leasable area. While 85% of its portfolio is dedicated to retail and 10.4% is office space, RioCan has been steadily expanding its residential segment, which now accounts for 4.6% of its portfolio. RioCan’s necessity-based retail tenants portfolio provides long-term income “security”, and ongoing diversification has added a layer of resilience to its operations.
For dividend investors, RioCan’s 5.9% distribution yield is attractive. While the yield is lower compared to that of close competitors including CT REIT, the real long-term value lies in its growth potential. Over the past two years, RioCan has consistently raised its distributions – a 5.9% increase in 2023 followed by a 2.2% bump for 2024. With a below-average payout ratio of just 61.7% of funds from operations (FFO) for the first nine months of 2024, there’s ample room for further dividend increases.
The trust’s leasing performance also stands out. RioCan’s committed and in-place occupancy rate hit an impressive 97.8% as of September 2024, with some new leases at spreads exceeding 30%. Additionally, its recent cost-cutting measures – including a 9.5% workforce reduction – should enhance cash flow and potentially support future distribution hikes.
Allied Properties REIT: A high-yield bet on the return to office
Allied Properties REIT offers a significantly higher yield of 10.4%, making it an appealing option for those prioritizing income. The REIT specializes in office properties, with its portfolio concentrated in urban workspaces. Although office real estate has faced challenges, Allied is optimistic about a recovery, citing improving occupancy rates and growing demand in Canada’s major cities.
The trust’s occupancy rates remain steady and decent at 85.6% in-place and 87.2% on a committed basis as of September 2024. However, the trust is carrying out a portfolio reorganization and its ongoing non-core property sales – expected to total $170 million in 2025 – are part of a strategy to reduce high-interest debt. The temporary revenue and income shocks pose a threat to its monthly distribution’s safety.
Allied Properties REIT’s recently high payout ratio of adjusted funds from operations (AFFO) is a concern. In the third quarter of 2024, AFFO dropped 14% year over year, pushing the AFFO payout ratio to an uncomfortable 96%. If the return-to-office trend doesn’t accelerate or property sales strategy fails to deliver cash flow relief as planned, the trust may be forced to cut its distribution – a risk income-focused investors should not ignore.
That said, with its units priced 60% below their last known net asset value (NAV) of $43.76, there’s potential for significant capital gains if the market revalues the REIT closer to its NAV as corporations fall in love with office-working again.
Which REIT is the better buy?
RioCan REIT offers a more stable and predictable investment with its highly sought retail assets, well-covered distributions, high occupancy rates, and moderate growth potential. It’s an ideal choice for conservative investors seeking reliable income without taking on excessive risk.
Allied Properties REIT, on the other hand, is a higher-risk, higher-reward opportunity. If you believe in the long-term recovery of office real estate and can stomach short-term volatility, its deeply discounted valuation and high yield could generate significant upside.
Ultimately, your choice depends on your risk tolerance and investment goals. For steady, long-term passive income, RioCan is the safer pick. If you’re comfortable with a speculative play, Allied Properties might be worth considering. Either way, both REITs bring unique advantages to the table – but knowing their differences is key to making the right decision for your portfolio.
