Canadian REITs Yielding Above 20%

Canadian REITs have been hit hard by COVID-19 mitigation efforts. Be warned however, chasing yield can lead to future dividend cuts or suspensions.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The current bear market is leading to the decimation of Canada’s Real Estate Investment Trusts (REITS). Year to date, S&P/TSX Capped REIT Index is down 31.39% in 2020, placing it among the biggest losers of the year. One thing is clear, however: Canadian REITs are not immune to COVID-19 mitigation efforts. 

The drop in share price is leading to record yields. Before the crash, real estate companies were among the best income stocks to own. These companies distribute a high percentage of earnings and are among the best yielding stocks. 

In the current environment, these high yields are magnified. As of writing, there are approximately two dozen Canadian REITs yielding above 10%. Although a high yield can be attractive, investors must proceed with caution. There have already been a few distribution cuts in the industry, and more are likely on the way. 

The top yielding Canadian REIT

As of writing, Morguard Real Estate Investment Trust (TSX:MRG.UN) is currently yielding 22.73%, which is tops among industry peers. Morguard holds $2.9 billion in assets and has a diversified real estate portfolio of 48 commercial properties across six provinces. 

The company’s high yield is not surprising. Morguard is among the worst-performing Canadian REITs and is down 63.44% in 2020. The company’s portfolio is split between Office (23), Industrial (4) and Retail (21) properties. 

Despite having fewer properties, the Retail segment accounts for 53% of revenue and net income. The company’s high exposure to retail space is among the main reasons for its underperformance. 

In 2019, the company ended the year with a distribution payout ratio of 88.1%, which was approximately 400 basis points higher than in 2018. In fact, Morguard’s payout ratio has been on a steady rise over the past couple of years. It now sits more than 20% above the 67.1% it achieved in 2017, and above the Canadian REIT average of approximately 70%. 

On the bright side, the company’s debt-to-equity (DE) ratio currently stands at 88%, which is consistent with historical averages, and inline with industry peers. 

Taking everything into account, Morguard’s 22.73% yield is most likely at risk of a dividend cut or suspension. The company’s high exposure to large shopping centers makes it more vulnerable than most. 

A little-known growth REIT

At 20.25%, PRO REIT (TSX:PRV.UN) is the only other Canadian REIT currently yielding more than 20 percentage points. The company is one of the lesser known in the industry, having only just graduated from the TSX Index in April of 2019. 

The company’s track record is impressive. Since 2013, total assets grew from $70.2 million to $634.7 million as of the end of 2019. Not many REITs can lay claim to this type of growth. 

In total, the company has 93 properties spread out across Retail, Industrial, Office and Commercial Mixed-Use segments. Once again, Retail leads the way accounting for approximately 36.7% of base rent. 

On the bright side, 65% of the retail segment are necessity-based assets. This includes groceries, drug stores, banks, government and medical offices. This is good news, as all are essential services and very few are at risk of default. It counts Rexall, Sobeys, the Government of Canada and Shoppers Drug Mart among its top tenants. 

Unfortunately, the company’s high-growth profile has come at a cost. The company’s payout ratio as a percentage of adjusted funds from operations is at 109%, among the industry’s highest. Similarly, PRO REIT’s 169% D/E ratio is almost double the Canadian REIT industry average. 

Once again, we find ourselves in a situation whereby the likelihood of a dividend cut or suspension is high. On the one hand, the company does have a solid base of tenants. However, it is among the least financially stable Canadian REITs.

Should you invest $1,000 in Morguard Real Estate Investment Trust right now?

Before you buy stock in Morguard Real Estate Investment Trust, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Morguard Real Estate Investment Trust wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Mat Litalien has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »