Canada’s housing market is extremely vulnerable. Homes in major cities are overvalued, while households are overleveraged. Rising interest rates could disrupt this segment of the economy in the months ahead. That should concern real estate investors.
However, if you’re looking for stable dividends from tangible assets, industrial real estate investment trusts (REITs) could be a better option. Here are the top two picks.
Summit REIT
Summit Industrial Income REIT (TSX:SMU.UN) has struggled to break out, losing about 13% of its market value year to date. The underperformance has coincided with the rising rates and growing concerns about a recession.
However, the underperformance does not accurately paint the industrial property REIT’s long-term prospects. Over the past four years, the REIT’s funds from operations have increased by 48% from lows of $19.6 million in 2016 to highs of $94.4 million as of 2020. Its total cash from operations has also grown to highs of $79 million, representing a 52% growth rate over the past four years.
Summit Industrial Income REIT is one of the best ways to bet on the underlying strength and value of the industrial supply chain. The REIT owns 33 million square feet of industrial sets on 153 properties. Its assets are also spread over four Canadian provinces as it also moves to add another five million square feet through expansion and redevelopment.
Increasing demand for industrial property amid growth in e-commerce and last-mile distribution are some of the factors that affirm Summit’s long-term prospects. In addition, an increase in average monthly rents for industrial properties, up 60% in Canada over the past five years, should allow the REIT to generate more funds from operations going forward.
That said, Summit Industrial Income REIT is an attractive prospect for anyone looking for broad exposure to industrial properties. After the 13% pullback, the REIT is trading at a great discount with a price-to-earnings multiple of three. It also offers a solid 2.65% dividend yield, ideal for generating passive income.
Dream Industrial REIT
Very few industrial REITs can match the quality of Dream Industrial REIT (TSX:DIR.UN). Last year, the REIT outperformed the S&P 500, going by a +30% share gain in the market. This year, the stock has lost some of that value. DIR is now trading just 13% higher than book value per share.
In addition, the REIT generated significant funds from operations, helped by rising rental rates. As demand for storage in the e-commerce sector increased, the REIT registered a 13% surge in funds from operation. That was higher than what the management had expected. Its net income increased by 133% in 2021, along with a 71% increase in net assets.
The tremendous growth might explain why Dream industrial REIT comes with a much higher dividend yield at 4.46%, which is ideal for generating some passive income in addition to share price gains. In addition, the REIT is fairly valued with a price-to-earnings multiple of five.
Dream Industrial REIT’s long-term prospects are looking increasingly bright due to low vacancy and strong demand reflected by soaring rental rates. Consequently, the REIT is projecting a 10% increase in funds from operations per unit this year. Dream Industrial is a perfect fit for generating passive income.
