What are we looking for?
Sustainable distributions from Canadian REITs already gaining from our falling interest rates.
The screen
This week’s move by the Bank of Canada to lop 50 basis points, or half a percentage point, from its benchmark interest rate will benefit consumers but also a host of industries. We see real estate investment trusts (REITs) as among the biggest winners.
Our team of analysts at The Successful Investor note that the unit prices of top Canadian REITs began rising in June, 2024. That followed the bank’s first of three cuts this year to its benchmark rate. Traditionally, REITs benefit when interest rates fall. For one thing, they generally carry high debt levels, and lower rates make it less expensive for REITs to refinance existing loans or take out new ones. Any resulting improvement to their balance sheets and revenue streams boosts the sustainability of their distributions to investors.
REITs also typically offer high yields, and so compete with fixed-income instruments for investor interest. Falling rates tend to lower the yields of bonds and other fixed-income investments just as falling rates tend to boost the attractiveness of high-yielding REITs.
Our search started with a list of Canadian REITs with already sound prospects. From there, we applied our TSI Dividend Sustainability Rating System, awarding points to a stock based on key factors:
- one point for five years of continuous dividend payments – two points for more than five;
- two points if it has raised the payment in the past five years;
- one point for management’s commitment to dividends;
- one point for operating in non-cyclical industries;
- one point for limited exposure to foreign currency rates and freedom from political interference;
- two points for a strong balance sheet, including manageable debt and adequate cash;
- two points for a long-term record of positive earnings and cash flow to cover dividends;
- one point if the company’s an industry leader.
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below-average sustainability, one to three points.
What we found
Our TSI Dividend Sustainability Rating System generated six REITs, all based in Toronto. RioCan REIT REI-UN-T owns shopping centres and other properties across Canada focused on six major urban markets: Toronto, Montreal, Ottawa, Calgary, Edmonton and Vancouver. Choice Properties REIT CHP-UN-T counts one of Canada’s biggest retailers, Loblaw Cos. Ltd., as the principal tenant for many of its properties. Allied Properties REIT AP-UN-T is zeroed in on office properties in seven Canadian urban markets: Montreal, Ottawa, Toronto, Kitchener, Ont., Calgary, Edmonton and Vancouver. H&R REIT HR-UN-T lets investors tap income from residential, industrial, office and some retail properties in Canada and the United States. In 2022, it spun off most of its retail properties, including all of its enclosed shopping malls, to a new publicly traded REIT called Primaris REIT PMZ-UN-T. Primaris owns enclosed and open-air shopping malls in Canada – including its recently acquired Halifax Shopping Centre and its Annex. Dream Office REIT D-UN-T owns office properties with a major emphasis on the downtown Toronto market.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.