Bank of Canada cutting the policy interest rate (by 0.50% since June) could be the catalyst that could help drive valuation expansion in Canadian real estate investment trusts (REITs). Lower interest rates can help REITs that are typically heavy in debt to lower interest expenses.
Here are some of the top Canadian REITs to consider buying this month.
InterRent REIT
InterRent REIT (TSX:IIP.UN) seems to offer good value in the defensive residential real estate industry. At $12.31 per unit at writing, the stock trades at a discount of over 15% from the analyst consensus price target. This represents upside potential of about 18% over the next 12 months. In the meantime, investors also get a not-bad cash distribution yield of almost 3.1%.
Notably, the Canadian REIT has increased its cash distribution for about 12 consecutive years. And its recent cash distribution increases were approximately 5-6%. Its funds from operations (FFO) payout ratio for the last quarter was sustainable at about 60%.
Earlier this month, it reported solid quarterly results. For the second quarter, it maintained a portfolio occupancy of 96.2%, which was an improvement of 0.8% from a year ago. For the new leases that it executed during the quarter, it was able to achieve an average gain-on-lease of 16.1% compared to expiring rents. Ultimately, it was able to increase its FFO per unit by 17% year over year.
Last year, the entirety of its cash distribution reduced the adjusted cost base of its unitholders’ positions, which essentially meant the cash distributions were tax-deferred unless your adjusted cost base turned to $0. This suggests that it could be tax-efficient to hold units in a non-registered account or a Tax-Free Savings Account (TFSA) but not the Registered Retirement Savings Plan (RRSP).
If you’re looking for more income, you can consider Dream Industrial REIT (TSX:DIR.UN) to see if it’s a good fit for your diversified portfolio.
Canadian REIT offering more income
The stock has been holding up well over the last 1.5 years after the recovery from the sell-off due to higher interest rates in 2022. At $13.24 per unit at writing, it trades at a discount of close to 17% from the analyst consensus target. This means it has upside potential of 20% over the next 12 months. Investors get to pocket monthly income with a nice cash distribution yield of almost 5.3%. Notably, though, the Canadian REIT doesn’t usually increase its cash distribution.
For the second quarter, Dream Industrial REIT’s occupancy rate was 95.4%. Year over year, its average base rent per square foot climbed 10% for its Canadian portfolio and almost 4% for its European portfolio. And its weighted average lease term was 4.3 years.
Year to date, it increased its net rental income by 5% to $173.5 million. Although the FFO rose 3% to $140.4 million, on a per-unit basis, it was flat at $0.49, resulting in an FFO payout ratio of 71%.
It ended the second quarter with a net asset value per unit of $16.73, which represents it trades at a discount of just over 20%.
