Investors looking to earn more passive income in their Tax-Free Savings Accounts (TFSAs) and retirement portfolios may load up on beaten-down publicly traded real estate assets in 2024 before the Canadian property market turns a corner. Canadian REITs (real estate investment trusts) pay monthly dividend distributions, and selected high-quality trusts have yields that are too attractive to pass up right now.
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Why REITs now?
Canadian REITs provide easy access to commercial real estate ownership, with professional management handling the daily hustles of directly managing rental properties. Recent interest rate hikes impacted REIT values, but some, like CT Real Estate Investment Trust (TSX:CRT.UN) and Granite Real Estate Investment Trust (TSX:GRT.UN), have low debt, strong occupancy rates, and growing rental income. The two REITs may continue to pay some of the industry’s safest distributions while investors wait for recoveries in property value.
Let’s take a closer look.
CT REIT: High occupancy, strong tenant, and safe distribution
CT REIT is a $1.5 billion retail property trust that owns a portfolio of more than 370 properties comprising about 30.9 million square feet of gross leasable area located across Canada. The REIT boasts a nearly perfect occupancy rate of 99.1% going into 2024, thanks to its steadily expanding key tenant, Canadian Tire, which occupies 91.3% of the trust’s properties (on an annualized rent basis) with a weighted average lease term of 8.6 years.
The REIT’s close relationship with its former parent, Canadian Tire, is essential for growth. While other retail REITs are cutting back on development activity because higher interest costs made new development activities less profitable, CT REIT’s new developments added almost 900,000 square feet of gross leasable area (GLA) to its portfolio last year. The trust had 571,000 more GLA under development going into 2024. The developments were 98.8% pre-leased. The relationship with Canadian Tire is accretive to growth and profitable as well.
Most noteworthy, CT REIT maintains a stellar balance sheet with a debt ratio of 41.4% going into 2024, an average interest rate of 4.07%, and an average debt maturity of 5.4 years. Its investment-grade balance sheet is a fortress for income investors seeking shelter. The passive-income play is well positioned to survive a high interest rate environment without cutting its distribution.
CT REIT stock pays monthly distributions that yield 6.6% annually. The REIT has religiously raised its distribution every year since going public a decade ago. Its payout for 2023 comprised a safe 73.4% of its adjusted funds from operations (AFFO) — a significant improvement from 74.5% in 2022. The distribution is well covered by recurring cash flow and may grow again in 2024 and beyond.
Granite REIT retains rent growth potential
The industrial real estate property market has cooled off in 2024, and vacancy rates are normalizing as the market absorbs new supply growth. However, there remain huge pockets of opportunity, and Granite REIT is one of the best industrial property plays for passive income and future capital gains right now.
The industrial REIT holds a geographically diversified portfolio of 143 commercial properties, comprising 62.9 million square feet of GLA, located in Canada, the United States, and Europe. The portfolio has grown significantly from 128 properties and 59.4 million square feet of GLA at the end of 2022.
Granite REIT averaged rental rate spreads of 24% over expiring rents last year. Following strong increases in rentals on industrial properties over the past few years, Granite REIT’s in-place rents remain below current market rates in some markets. The trust may report positive same-property net operating income growth rates as it renews leases at higher rates this year.
Meanwhile, the REIT’s low debt leverage ratio of 33% could make peers envious. The trust’s AFFO payout rate improved to 70% during the fourth quarter of 2023 from 75% during the prior year’s quarter. Management expects AFFO to grow by 3-7% this year, providing room for a potential distribution increase in the near future.
Although portfolio occupancy rates slightly dipped to 95% at year-end last year, the trust had completed a major development in 2023. Leasing efforts in 2024 should help secure the REIT’s distributions well into the future.
Granite REIT pays monthly distributions that yield 4.8% annually in passive income.
