The Drop in REIT’s has mostly been caused by interest rates. Does this make sense? Yes they are greatly affected by the interest rates but realistically the US may rise rates but their economy and Canada’s are actually declining. This is not the time to rise interest rates. And as of late in Canada there have been talks of another rate cut. If they cut rates it helps REIT’s so I don’t consider the drop in price at this point warranted rather it is a buying opportunity.
I consider a high yield in some companies a danger sign or a trap to get you in before they slash it or reduce it greatly. REIT’s are different in this way but we still need to ensure the payout can be sustained. I consider over 90% payout ratio on a REIT unsustainable over the long term, I also consider around the 80-90% range where you would like the payout to be.
Yield is the other metric I look to, this is the actual %yield you will be paid based on the stock price. I don’t like stocks with less the 3% yield, but REIT’s are quite different as they don’t have the growth potential of most stocks rather they are more on an income fund. Therefore you want to invest in the REIT with a high yield but payout ratio below 90%.
Also right now as many of these REIT’s have been sold off there is an opportunity to get your high yield along with some growth as the REIT’s correct (at least in my opinion). Below I have highlighted some of the larger REIT’s and their metrics to help in my decision making.
Dream Office REIT
D.UN is yielding over 9%! That is a huge yield and down nearly 20% from its 52 week high. From a payout ratio standpoint its at 90% which is fine especially for such a high yield, but there is one thing that bothers me about this and it is the diversity. D.UN is an office REIT meaning it rents office to clients across Canada. If you feel the office sector is safe this is a great beat to make some money on a high yield but to me it seems to good to be true and I feel more comfortable with the diversity of companies like RioCan.
I knew very little about this company when I started this post but have learned quite a bit. Its metrics are great, stock down 15%, yield over 7%, and payout ratio less than 85%. I consider these metrics perfect for a REIT with some room to grow that yield or add to the portfolio. AX.UN owns quality office retail and industrial property which gives some diversity. They own 25.2% retail, 23.1% Industrial and 51.7% office space. They also have properties in both Canada and the United states with 241 properties, a massive amount of leasable space and a 94.7% occupancy rate this REIT looks pretty attractive. They also have some high quality occupants such as Bell, Homedepot, Sobeys, #M, TD Trust, Shoppers, AMEC and both federal and provincial office buildings. I believe at the current levels and metrics this represents a great buy, my only concern is many holdings in Alberta but they are high quality and I believe it will not hurt the core business.
I believe the REIT sector right now represents a great buying opportunity and I do not think interest rates if they do rise will be by a very high percentage. Therefore, I believe this is a great opportunity to purchase some of these REIT’s at a discount and cash in on the long term yields. I intend to initiate a position shortly in a Canadian REIT but some more research is required before I do so.