Real Estate Prices Finally Soften: Buy These 2 REITs?

Two recovering REITs should attract investors if real estate prices continue to soften and the central bank raises interest rate again.

| More on:

Image source: Getty Images

Is the softening of Canada’s supercharged housing market for real? The 12% decline in home resales between March and April seems to suggest that the rising interest rate is starting to weigh on home prices. The Bank of Canada will most likely announce the third installment of its rate-hike campaign on June 1, 2022.

Prospective homebuyers hope the market imbalance corrects soon to bring down home prices further. RBC Economics said the severe imbalance is easing. The bank notes that in some markets, the sales-to-new listings ratio reached balanced-market territory last month.

On the stock market, the real estate sector is the fourth worst performer after healthcare, technology, and consumer discretionary. However, if real estate prices continue to moderate, the sector would regain lost ground. Real estate investment trusts (REITs) like H&R (TSX:HR.UN) and Dream Office (TSX:D.UN) should be back on investors’ radars.

Repositioning plan

In Q1 2022, H&R reported declines in rentals from income properties (-24.23%) and net operating income (30.89%) versus Q1 2021. However, net income climbed 508.15% year over year to $970 million. This $3.88 billion REIT owns a high-quality real estate portfolio in North America. Office, industrial, residential, and retail properties comprise the portfolio.

Tom Hofstedter, H&R’s CEO, said, “Our strong first-quarter financial results mark a pivotal moment in the continuation of our transformation and the surfacing of the embedded value within our portfolio.” He added that the current portfolio today concentrates on higher growth asset classes. H&R has no more shopping centre division and also sold an office campus.

After the changes at the top, Hofstedter said that H&R is ready to execute its repositioning plan. Based on market analysts’ forecast, the upside potential in 12 months is 29.65%. This REIT trades at $13.22 per share and pays a 4.16% dividend.

Premier office landlord

Michael Copper, the CEO of Dream Office, said, “Our business has continued to navigate through uncertainties in the economy and recovery from the pandemic with resilience.” The $1.08 billion REIT is the premier office landlord in Toronto. While net rental income in Q1 2022 dropped 1.55% versus Q1 2021, net income increased 415.30% to $52.28 million.

Cooper said that the net income for the quarter includes the $25.9 million net rental income from Dream Industrial. Dream Office has investments in the REIT. As of March 31, 2022, the portfolio consists of 29 active properties and one under development.

Management anticipates more employees to return to offices during 2022. H&R’s leasing activity and traffic flow to its properties will materially improve net operating income. Parking revenues should also normalize. If you invest today, the share price is $23.08, while the dividend offer is 4.33%.

More supply and less competition

Real estate prices and housing demand might not be as elevated anymore after the central raises its key interest rate next month. Homebuyers look forward to a balanced market also where inventory or choices are more, but minus the competition or bidding wars.

Meanwhile, REITs are alternatives to buying physical revenue properties. You don’t need substantial cash to invest in H&R and Dream Office to generate rental-like income.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »