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What are we looking for?

Real estate investment trusts poised to benefit from falling interest rates.

The screen

CIBC recently predicted aggressive cuts to interest rates of 50 basis points in both December and January. They expect rates to bottom out at 2.25 per cent in June, 2025, a significant drop from the current Bank of Canada interest rate of 4.75 per cent. As savings rates fall in lockstep with interest rates, investors may be on the lookout for other sources of yield.

REITs stand out in this environment for their ability to offer both high dividend yields and potential capital gains. They typically rely on extensive debt to fund property acquisitions and developments, making them particularly sensitive to changes in interest rates. Lower rates translate to reduced borrowing costs and increased profitability.

To identify REITs that will benefit from falling rates, I used FactSet’s screening tool and applied the following parameters:

  • Traded on the S&P/TSX Composite
  • Market capitalization greater than $1-billion
  • FactSet Sector – “Real Estate Investment Trusts”
  • Dividend yield greater than 3 per cent
  • Variable debt as a percentage of total debt greater than 10 per cent, highlighting companies that will benefit the most from lower interest rates

The eight remaining companies were ordered by a multifactor ranking of dividend yield, price-to-funds from operations (a key real estate valuation metric of profitability), price-to-book, and variable debt as a percentage of total debt.

What we found

8 REITs for current interest rates

RANKNameSymbolSECTORPRICE ($)MKT. CAP. ($ MIL.)1Y TTL. RTN. (%)DIV. YLD. (%)VARIABLE DEBT ($ MIL.)TOTAL DEBT ($ MIL.)VARIABLE DEBT AS % OF TOTALINTEREST COVERAGE RATIO (x)P/FFO (x)PRICE/BK VALUE (x)
1 Allied Properties Real Estate Investment TrustAP-UN-TOffice Equity REITs19.02,630.4-9.19.51,676.44,272.539.21.68.50.4
2 RioCan Real Estate Investment TrustREI-UN-TRetail Equity REITs20.56,194.33.65.43,473.67,141.348.62.611.60.7
3 NorthWest Healthcare Properties Real Estate Investment TrustNWH-UN-THealthcare and Life Sciences Equity REITs5.41,342.7-21.56.71,203.73,673.032.81.111.80.7
4 Primaris Real Estate Investment TrustPMZ-UN-TMulti-Type Equity REITs16.01,553.414.25.2200.01,520.313.22.79.80.6
5 SmartCentres Real Estate Investment TrustSRU-UN-TRetail Equity REITs27.14,657.411.16.81,075.85,093.321.12.512.80.7
6 Granite Real Estate Investment Trust Stapled Units - 1 Granite RE Inc + 1 TU Granite REITGRT-UN-TIndustrial and Warehouse Equity REITs81.05,081.95.24.11,203.43,095.638.94.515.50.8
7 Dream Industrial Real Estate Investment TrustDIR-UN-TIndustrial and Warehouse Equity REITs14.44,169.61.14.9916.22,950.931.14.814.40.8
8 Chartwell Retirement ResidencesCSH-UN-THealthcare and Life Sciences Equity REITs15.74,385.751.83.9281.72,224.112.70.723.33.2

Source: Factset

Allied Properties Real Estate Investment Trust AP-UN-T, an urban office space developer, topped our screen with an impressive 9.5-per-cent dividend yield. With 39.2 per cent of its debt classified as variable, it stands to greatly benefit from rate cuts. However, its interest coverage ratio of 1.6, a measure of how easily a company can cover interest expenses with earnings, is below the screen’s average of 2.6. This additional risk may explain why Allied Properties is trading at the lowest price-to-book and price-to-funds from operations ratios. Despite these risks, the REIT is well positioned for a strong recovery as interest rate reductions ease its debt burden.

RioCan Real Estate Investment Trust REI-UN-T, a retail-focused real estate manager, ranked No. 2 on our screen with a 5.4-per-cent dividend yield. Notably, 48.6 per cent of RioCan’s debt is variable, indicating substantial upside from rate cuts. RioCan’s tenant base includes resilient consumer staple companies such as Loblaws and Shoppers Drug Mart, providing some downside protection should rate cuts be less aggressive than anticipated.

The information in this article is not investment advice. The author assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.

Arjun Deiva, CFA, is an MBA Candidate at the University of California, Berkeley, Haas School of Business

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 21/11/24 9:31am EST.

SymbolName% changeLast
AP-UN-T
Allied Properties Real Estate Inv Trust
+0.22%18.02
REI-UN-T
Riocan Real Est Un
0%18.82
NWH-UN-T
Northwest Healthcare Prop REIT
-0.2%4.88
PMZ-UN-T
Primaris REIT
-0.25%16.02
SRU-UN-T
Smartcentres Real Estate Investment Trust
-0.36%25.16
GRT-UN-T
Granite Real Estate Investment Trust
-0.7%73.46
DIR-UN-T
Dream Industrial REIT
-0.47%12.67
CSH-UN-T
Chartwell Retirement Residences
+0.12%16.07

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