It’s been a tough couple of years for investors and so far 2023 hasn’t been much easier. Here at Savvy Canadian Finance, we are always looking at different investment assets to provide insightful information to our readers. In this article, we’ll be diving into REITs or Real Estate Investment Trusts. Are REITs a good investment in 2023? Let’s find out!
In an economic environment with rising interest rates, high-growth assets are the ones that get hit the hardest. Investors are seeking out steady, income-bearing assets and REITs fit that category perfectly. If you are looking for stable investments with high-yielding dividend distributions, it is time to consider looking at REITs for your portfolio.
While the first REIT was founded in the United States, the asset has gained popularity around the world. There are thousands of publicly-listed REIT companies that trade in more than 40 countries including every G-7 nation.
What is a REIT?
Let’s start with what exactly a REIT is. REITs were essentially created in 1960 when President Eisenhower signed the Cigar Excise Tax Extension. This formally allowed individual investors to invest in large, diversified portfolios of real estate. These portfolios would trade on the same asset markets as other investments like stocks.
REITs are a great way for investors to own stakes in real estate without actually owning those properties. Think of a REIT as a mutual fund or ETF of real estate properties. You can buy units of a REIT like shares of stock. These REITs trade on the major stock exchanges and can be held in any registered or non-registered accounts.
To qualify as a REIT a company must meet the following requirements:
- The company must invest at least 75% of its total assets in real estate properties
- The company must earn at least 75% of its gross income from rent, mortgages, or the sale of properties
- It must also pay at least 90% of its taxable income to shareholders as a dividend
- Be a taxable corporation
- The company must be managed by a board of directors or trustees
- It must have at least 100 unique shareholders
- And have no more than 50% of its shares held by five or fewer investors
These seem like pretty stiff regulations on a company. So what is the benefit of being a REIT? Taxes. For most REIT companies, they pay out all of their taxable income as dividends. This essentially means they do not pay any corporate income taxes.
What Types of REITs Are There?
In general, we divide the REIT market into three distinct categories:
- Equity REITs
- Mortgage REITs
- Hybrid REITs
Equity REITs make up a majority of the REIT industry. These are companies that own properties and collect monthly rental income. This can be anything from apartment buildings to corporate offices to supermarkets.
Mortgage REITs deal with the mortgage side of real estate and earn income off of the interest on these investments.
Hybrid REITs, as their name suggests, use a combination of both Equity and Mortgage REIT operations in their business.
Do REITs Pay Dividends?
Yes! In fact, these distributions are the main reason why people invest in REITs in the first place. Capital appreciation isn’t the strong suit for REITs. The true value comes from collecting quarterly or even monthly dividends. One of the first things you will notice when researching REITs is that there is very little price movement. In fact, most of the major REITs will underperform markets like the S&P 500 index. But they more than makeup for a lack of capital appreciation with generous dividends.
Think about a REIT paying between 90-100% of its taxable income as dividends. This is similar to saying any rental income they earn is paid to shareholders. You can earn monthly “rental income” from owning REIT stocks at a much lower cost than owning your own property. It is also much easier than being a landlord with renters.
How are REIT Distributions Taxed in Canada?
It’s a great question and something you should always be aware of before making an investment. REIT distributions are taxed as regular capital gains in Canada in a non-registered account. In a registered account like a TFSA or RRSP, you won’t have to worry about being taxed on distributions.
Holding REITs in a non-registered account can certainly eat into some of those distribution gains. If you want to fully benefit from investing in REITs, we suggest doing so in a TFSA or RRSP to maximize your long-term gains.
What are the Best REIT Stocks to Buy for 2023?
Many of the largest REITs in the world trade on the US stock markets. Just because they trade on the US exchanges, does not mean they only hold US property. In fact, many of the largest REITs hold plenty of international real estate. Let’s take a look at the 10 largest US-listed REITs for 2023:
|Stock Symbol||REIT Company||Distribution Yield||Market Capitalization|
|NYSE: PLD||Prologis||2.85%||$112 billion|
|NYSE: AMT||American Tower||3.18%||$91 billion|
|NASDAQ: EQIX||Equinix Inc.||2.01%||$63 billion|
|NYSE: CCI||Crown Castle Inc||4.85%||$56 billion|
|NYSE: PSA||Public Storage||4.06%||$56 billion|
|NYSE: O||Realty Income Corp||4.82%||$41 billion|
|NYSE: SPG||Simon Property Group Inc||5.99%||$39 billion|
|NYSE: WELL||Welltower Inc||3.38%||$35 billion|
|NYSE: VICI||VICI Properties Inc||4.65%||$33 billion|
|NYSE: DLR||Digital Realty Trust Inc||4.79%||$29 billion|
|NASDAQ: SBAC||SBA Communications Corp||1.32%||$27 billion|
As you can see, some of the largest REITs in the US have massive market caps. What about REITs in Canada? There are plenty of REITs that trade on the Toronto Stock Exchange. Here are a few of our favourites at Savvy Canadian Finance:
Canadian Apartment Properties REIT
|Market Cap||$8 billion|
|52-Week Trading Range||$39.08 – $55.99|
|Assets Owned||$17 billion|
Canadian Apartment Properties REIT is one of the best REITs in Canada. It owns over $17 billion in assets that include apartment buildings across the country. This includes real estate hot spots like British Columbia and Ontario. It is the largest single apartment owner in Canada.
With a great history of solid distributions and a five-year return of more than 40% to the price of the stock, this REIT provides both income flow and growth.
|Market Cap||$4 billion|
|52-Week Trading Range||$24.94 – $33.48|
|Assets Owned||$11 billion|
Smartcentres is Canada’s largest retail REIT. It owns $11 billion in retail real estate assets and its largest customer is Walmart. Other clients that Smartcentres rents its properties to include Loblaws, Shoppers Drug Mart, Royal Bank of Canada, Lowe’s, Home Depot, McDonald’s, Dollar Tree, Scotia Bank, Toronto Dominion Bank, Bank of Montreal, and CIBC.
This REIT yields an impressive 6.71% distribution to shareholders. It has underperformed over the past five years, but much of that has to do with the closure of retail stores during the COVID-19 pandemic. With the pandemic restrictions behind us, Smartcentres is trading near its 52-week lows and looks like it could be positioned for future growth.
|Market Cap||$3.6 billion|
|52-Week Trading Range||$24.77 – $48.89|
|Assets Owned||$8 billion|
For a time, it looked like Allied Properties would be a loser coming out of the pandemic. This REIT owns corporate office space and it seemed like the entire world was shifting to working from home. But now, with many major corporations ordering workers back to the office, it looks like Allied Properties is ready to thrive again.
This is another REIT that is trading near its 52-week lows and is yielding a distribution of more than 6%. Allied Properties owns valuable real estate in Vancouver, Toronto, and Montreal, and added to its portfolio of properties over the past couple of years. This could be great timing for collecting rent on offices that are once again being used.
Are REITs a Good Investment in 2023?
As with any assets, REITs have their definite pros and cons. The benefits are clear: stable assets that often yield a monthly distribution to your account. In this way, REIT stocks are very much like blue-chip stocks or dividend ETFs.
Nobody knows where the market is headed this year or next. We could very well continue to see the effects of the bear market on growth stocks. This makes safer, income-bearing assets much more appealing. REITs provide a nice balance of capital growth and frequent distributions.
Of course, this is always going to be a matter of personal preference. Do your own research into REITs and see if they fit your risk tolerance, investment goals, and investing horizon. This article is not meant to be financial advice but a starting point in learning about REITs in 2023.