A warehouse rarely makes the news until someone can’t get the thing they ordered. For investors, that’s part of the charm. Tenants pay for the space whether the boxes inside hold running shoes or car parts. Two landlords can collect similar rent cheques and still offer investors very different deals.
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Start with the rent
Industrial real estate investment trusts (REIT) own space for manufacturing, storing and moving goods. They pay out some of the cash as distributions. If a tenant leaves, the owner can lose rent and still have to pay for repairs, taxes and interest while it looks for a replacement.
I’d start with the cash each landlord has left after routine property spending. Adjusted funds from operations (AFFO) is one way a REIT estimates that amount. Definitions differ, so I like to compare each trust’s payment with its own cash earnings before comparing the yields. A rent increase can take years to show up across the whole portfolio. Leases expire on different dates, and a landlord may have to offer a tenant money for renovations. I’d watch how much higher rents add to the cash left after those costs.
A higher yield gives me more spending money right away. A lower yield can catch up if the landlord can raise rents and keep lifting the distribution. I’d decide which job I need done before picking among monthly dividend stocks.
More room to raise the rent cheque
Granite REIT (TSX: GRT.UN) owns industrial properties in North America and Europe. It has roots as an automotive landlord and has broadened its holdings over time. In November, it announced new property purchases and an increase in its targeted distribution starting with December’s payment period.
Granite earned $1.45 per unit in AFFO in the third quarter, up from $1.26 a year earlier. It paid out 61% on that measure at the old rate. That leaves cash for the decidedly unglamorous expenses that keep the rent coming in, like fixing a roof or getting a building ready for a new tenant.
Meanwhile, Dream Industrial REIT (TSX: DIR.UN) also owns warehouses across multiple markets. Its third-quarter funds from operations rose to $0.28 per unit from $0.27. FFO is an earnings measure for property businesses, so it doesn’t deduct all the costs AFFO tries to capture. I’d therefore follow Dream’s cash after leasing and property spending before assuming that higher starting yield will keep growing.
Put both on the same budget
At the recent share price, Dream’s published annualized distribution of $0.72 gives it a yield of about 5.6%. Granite’s new target of $3.70 gives it about 4.3% once it kicks in. November income buyers should remember that Granite’s first payment at the higher rate is expected in January.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| GRT.UN | $86.92 | 115 | $3.70 | $425.50 | Monthly | $9,995.80 |
| DIR.UN | $12.91 | 774 | $0.7175 | $555.34 | Monthly | $9,992.34 |
On the same $10,000, Dream starts about $130 a year ahead. I’d pay Granite’s higher price for its earnings cushion and the chance of another raise, particularly if I’m still reinvesting. Granite has also announced a three-for-one split. The table uses pre-split units and the equivalent pre-split payment rate. The split changes how many units an investor holds and what each unit pays. The total amount that position earns from the distribution is unchanged by the split itself.
Higher borrowing costs can spoil the picture for both. A warehouse can be full and still send less cash upstairs to investors when its mortgage renews. I’d look at debt coming due alongside the property numbers and spread my real estate money across a wider group of Canadian dividend stocks.
Bottom line
All considered, I’d choose Granite if I have years to let those cheques grow. If I need the extra income now, Dream makes a fair case for a smaller position. The best reason to own either is a rent roll that can keep doing its job through a slow year.
