Watch list
Not all REITs are created equal. The pandemic has drawn a line between industrial REITs and residential REITs, and office and retail. The former has benefitted from the explosion in e-commerce, work-from-home and the migration to the suburbs, while the latter have languished from lockdowns. God willing, the lockdowns will finally end in this year as humans finally tame this virus. However, the revival in offices and shopping malls could take a while. Who knows how quickly?
The housing boom across North America is well-documented, but less ink has been spilled on industrial REITs which remains white hot. Colliers Canada National Market Snapshot of 2021 Q4 sums it up in one line: The country’s vacancy rate in downtown office space is 13.3%, for suburban office space 12.1% and industrial space at 1.3%. That’s nearly 10 times lower than all office space. Another line from the report adds to the tale: total square feet of all office space currently under construction totals 19,291,955 square feet vs. 34,295,085 for industrial space. Further, nearly four times as much industrial space was added in 2021 compared to office, and yet demand continues to rage.
The industrial vacany rates are most acute in Vancouver, Victoria, Toronto and Montreal, all below 1%. Cities like Winnipeg, where commercial and retail estate have been decimated, are now enjoying a boom in industrial REITs. Even if we overcome Covid this year and enjoy a true, lasting reopening, e-commerce will endure to satiate cash-rich consumers who have been used to clicking BUY online. So, how can investors participate?
H&R Real Estate Inv Trust (HR.UN-T)
2022 began with shares of H&R plunging from $15.89 to $12.74. What happened? Primaris. H&R spun-off its shopping malls into Primaris, and awarded shareholders one share in Primaris for every four H&R stock. Hence the nearly 20% drop in HR.UN-T. The new, slimmer H&R will focus on industrials and American multi-family homes, promising areas to be in.
H&R boasts sound fundamentals: a 7.3x PE which beats RioCan‘s 15.9x and Choice Properties‘ 35x; gross margins are in line with peers; its profit margins edges out those two peers; and the 5.19% dividend yield is safe at a 39.53% payout ratio. Though it’s still early, H&R shares have inched up since the spin-off and this REIT is certainly worth watching, unless you want to enter with a partial position.
Summit Industrial Income REIT (SMU.UN-T)
Summit holds 160 mostly one-storey, light industrial properties in cities in Ontario, Quebec, Alberta, BC and New Brunswick. Last September, Summit bought two state-of-the-art logistics centres close to the Calgary International Airport, totalling 725,000 square feet. Though Calgary’s industrial 4.1% vacancy rate is far higher than Vancouver’s, Montreal’s or Toronto’s, the very lack of space in those cities makes Calgary attractive. In fact, demand is so strong that currently 7.3 million square feet of industrial is being added to Calgary compared to only one million in office space. Add that to the nearly 1.6 million square feet built in this city last year, 14 times more than for office.
There’s a lot to like with Summit stock: a 3.3x PE, margins which blow away its peers, such as its 520% profit margin, and the same with its ROE of 31.32%. There are only two flags, however: Summit pays only a 2.62% dividend, the lowest in its class, and shares are currently trading at highs not seen in a decade. Still the street foresees 16% upside to $25.01. I prefer stepping in with a pullback during this current volatile market.
Granite REIT (GRT.UN-T) Past pick on July 19, 2021, Up 21.35% (including dividends)
This is another REIT sailing around highs and for good reason. Though based in Toronto, Granite REIT holds 52% of its portfolio in the U.S. plus about 20% in Canada and smaller amounts in Austria, Holland, Germany and Czechia. In terms of revenue compared to floor space in the portfolio, Canada slightly underperforms while America is inline and Austria punches above its weight.
Granite’s large American presence makes this REIT unique on this list. America is sharing the same shortage for industrial space as Canada. For instance, CBRE pegs Chicago’s vacancy at 4.0%, with the top 10 growth markets all American. Granite REIT’s PE clocks in at a very respectable 5.8x and margins which handily beat Allied and Dream REITs. The same goes with its ROI of 16.72% vs. Dream’s 12.35%. The dividend yield clocks in on the low side in this sector at 3.08% but is solid at a lowly 16.47% payout ratio. Oh, yeah, Magna is one of Granite’s biggest clients.
Granite’s chart has been a on tear since the Great Recession’s bottom of 2009, and there’s room to run, though the street sees only 6.7% upside to $107.33. Consider that Granite’s PE has actually been falling in the past 12 months and was more than double a year ago. Granite has been a winner and will continue to be, but wait for a pullback.
