Looking for a REIT for your portfolio? Want the best REIT? The reality is that REITs can have different focuses and therefore more than one can fit the bill thus allowing you to diversify your portfolio. You might not be aware but there are 39 Canadian REITs trading on the Toronto Stock Exchange (TSX). However, only 19 have a market capitalization above $1B.
Let’s start by looking at the full list of REITs and then drill down from there. The Canadian REIT sector has 7 industries to which a REIT belongs to based on the services they provide. Knowing the industry they serve is quite important as it highlights what can influence their business.
I admit that I was pretty surprised to find 39 REITs in total. That’s a lot of real estate income trusts to filter through. Choice Properties is the recent REIT created by Loblaw out of its real estate assets. I sorted the list by market capitalization rather than yield. A REIT has a high yield just by the nature of the REIT and I am not looking for the REIT that pays the most but the REIT that will serve me best in the following criteria:
- Decent Income
- Consistent Payout
- Stock Growth Potential
- Dividend Growth Potential
Most Canadian REIT investors will have the same criteria with different priorities but they are pretty standard. Below is the breakdown of all Canadian REITs by industries.
Click here to get your own spreadsheet
|RioCan||H&R Reit||Smart Center REIT||Canadian Apartment Properties||Canadian REIT|
|Allied Properties REIT||Chartwell Retireent Residence||Cominar REIT||Boardwalk REIT||Granite REIT|
|Artis REIT||Dream Office REIT||CT REIT||Crombie REIT||Choice Properties REIT|
|Pure Industrial REIT||Dream Global REIT||Northview Apartment REIT|
REIT – Residential
|Morguard REIT||Northwest Healthcare Properties|
|InterRent REIT||Plaza Retail REIT||American Hotel Income Properties||Slate Retail REIT||Dream Industrial|
|Dream Hard Asset Alternative||Morguard North American||Slate Office REIT||Agellan Commercial REIT||Summit Industrial Income Fund|
|Inovalis REIT||BTB REIT||Partners REIT||True North Commercial REIT||Melcor REIT|
|Automotive Properties REIT|
Best Canadian REITs
To find the best Canadian REITs fitting my criteria, I choose to go through the following steps.
- Filter the REITs based on my investing criteria
- Get a better understanding of the filtered companies
- Review their FFO (and AFFO) – That’s one of the most important metrics with REITs
Get all the details you need to make an investment decision with the Dividend Snapshot Canadian REIT List. A comprehensive list of metrics and a payout ratio calculated based on the company’s FFO. Don’t be fooled by the highest yield and get the right fit for your portfolio and income.
Related: Understanding REITs
Filtered Down Canadian REITs
I decided to eliminate the little players. They may well have a lot of growth but I want an established REIT of at least $1B in market capitalization. With that criteria, they can have funds to expand and play in the big cities. That leaves us with 19 REITs.
For the purpose of my selection, I will go with $1B as a minimum market capitalization. I am going to exclude the industrial REIT industry as I don’t understand that industry. Healthcare is also not a REIT I understand. There is definitely a growing market but I am not sure how the business model works. It leaves me with the list below sorted by market capitalization.Click here to get your own spreadsheet
Understanding the Filtered Canadian REITs
Now comes the hard part. The easy filtering is done. I could easily remove those with a yield under 5% but I am curious if they grow their yield and what the properties actually are. If you have Wal-Mart as a renter, the chances of long-term business is much stronger than having an arbitrary business. Personally, I have invested in both REI.UN and CUF.UN in the past. See my portfolio holdings for details. At this point, I think many of those investments have their own strength but the best of the breed has been RioCan for many years according to many analysts.
H&R Reit is well diversified across Canada with 20% of their assets in the US. Their portfolio includes
- 42 office properties
- 167 retail properties
- 112 industrial properties
- 2 development projects
Their distribution has seen regular increases which is attractive for an investor. This is not something that RioCan has done. Their tenants are mostly corporation when you compare with RioCan which includes
- Encana Corporation
- Bell Canada
- Hess Corporation
- TransCanada Pipelines
- Telus Communications
- New York City Department of Health
- Giant Eagle
- Canadian Tire
- Bank of Nova Scotia
52% of their revenue source comes from corporations. I would be curious to know which pays more, a retail tenant or a corporate tenant. I am quite impressed with H&R REIT.
REF.UN advertises a 15.6% 20-year annual return. That basically beats the stock market averages 🙂 Are you a skeptic of the performance now? The stock chart does have a pretty linear growth over the past 10 years. This is a REIT showing stock appreciation with a relatively low yield.
REF.UN is not a high-income play. With this dividend yield, I would compare it with other dividend aristocrats to understand which can better serve your portfolio over time.
This is a shopping mall nirvana with a 99% occupancy. In terms of the tenant, Smart REIT provides space for 82 Walmart stores. That might be the next best thing to investing in Walmart itself 🙂
Smart REIT is definitely operating in the same space as RioCan. The tenants are similar and it comes down to their operating abilities.
The dividends don’t see much movement but the stock has definitely appreciated over time. If you are thinking of managing the rental property on your own, you might want to consider BEI.UN but if you are looking for income from REIT, I would pass on this one. I can assume that the yield is lower due to the regular increase in value over time.
The adjusted funds from operations (AFFO) is the true metric you need to look at for REITs as it highlights how well they can pay their shareholders. A company with an AFFO below their payout means they can’t keep up paying the shareholders. A REIT that can increase their AFFO will be able to increase their distribution to shareholders.
What’s the right target? I think that anything above 90% for a sustainable period of time is a warning sign.
Canadian REIT ETFs
If you find it to difficult to invest in a specific REIT, you can always buy a Canadian REIT ETF. Be sure to look at their holdings as they may only hold a subset of the REITs.
- iShares S&P/TSX Capped REIT Index Fund TSE:XRE
- BMO Equal Weight REITs Index ETF TSE:ZRE
- Vanguard FTSE Canadian Capped REIT Index ETF TSE:VCN
The above mentioned ETFs are probably the best Canadian REIT ETFs at this point in time. However, be on the lookout as most financial institutions are entering the ETF market and they should all be creating their own in due time.
Canadian REITs Summary
I will admit that it’s impressive to see the number of REITs available in Canada. I was pretty surprised at the business of H&R REIT with their corporate tenants and the amazing setup Boardwalk REIT has with its residential monopoly. In the past, when I first purchased REITs, I had no understanding of the AFFO and since I learned about that metric, it will change how I evaluate REITs forever.Click here to get your own spreadsheet
You HAVE to read their financial report for the year-end. It’s not just raw numbers. It highlights their businesses and strength. You get to understand the strength of their sector.
Which is the best Canadian REITs? Well, it really depends on your goals. Do you want to see dividend growth? Some of them have it. Do you want to only pick below 90% AFFO payout? Some of them fit the bill. Do you want to see growth in value? Some of them have it. Do you want high income? Some of them have it.
As you can see, there isn’t just one Best Canadian REIT. There is a best Canadian REIT for your portfolio based on your criteria. Are you nearing retirement? Are you starting and diversifying?
If you are new to REIT investing, you need to understand REIT taxation prior to making a purchase. The account you decided to use has a big tax impact.
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