My Rental Income from 7 Canadian REITs

Many people like to receive rent from properties. On the other hand, I don’t want to manage properties or spend time keeping good relationships with tenants. Instead, I like to sit back and receive passive rental income from my Canadian REITs.

My Canadian REIT portfolio of 7 companies that make up roughly 12% of my dividend portfolio. Yet, they contribute close to 22% of my portfolio income.

I first go over my highest yielding Canadian REITs that offer income of 9% or higher. Then, I talk about the less risky REITs with yields of 4-6%.

By analyzing my Canadian REIT income portfolio, we can probably learn something. Here it goes!

REITs Provide Good Income

The first thing to note is that my Canadian REIT portfolio generates 22% of the income in my dividend portfolio even though it only makes up 12% of my portfolio value. That seems to indicate that distributions is a major part of REIT returns.

Well, it’s true that many REITs, including 4 of my REIT holdings yield 9% or higher right now.

Canadian REIT Portfolio Allocation

I analyzed my REIT portfolio in terms of their allocation according to market value, as well as income allocation. And I will talk about each Canadian REIT later on in the article as well.

My Canadian REIT allocation by value and by income

Source: Author

You’d notice that 28% of my Canadian REIT portfolio is Plaza Retail REIT (TSX:PLZ.UN), and it also contributes to 22% of my Canadian REIT income. I’m comfortable with the concentration in Plaza Retail REIT because of its track record and growth potential.

Northview Apartment also has a good track record of maintain distributions. However, its properties are mostly located in resource provinces. So, it is a good income play, but should only be bought when its yielding around 9% at historical highs.

The other Canadian REITs add diversification to the REIT income stream. Looking at the industry or asset class allocation, it looks pretty balanced with residential REITs making up almost one-third of the pie. That’s fine because everyone needs to live somewhere. If you’re not buying, you’re renting.

Canadian REITs with High Yields of 9% or Higher

My high yield REITs include Northview Apartment REIT (TSX:NVU.UN), NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN), Dream Global REIT (TSX:DRG.UN), and Dream Office Real Estate Investment Trst (TSX:D.UN).

REIT Industry Yield Price Market Cap Debt/Cap
NVU.UN Residential REIT 8.9% $18.25 $577M 39%
NWH.UN Healthcare REIT 9.1% $8.83 $462M 53%
DRG.UN Diversified REIT 9.6% $8.31 $941M 48%
D.UN Office REIT 12.2% $18.41 $2B 35%

Prices, yields, and market caps based on November 24, 2015 closing prices.

The market return on average is 7%. Yet, these REITs give distributions higher than that. What’s the catch?

Usually, the higher yield a stock offers, the likelier it is higher risk. Additionally, most of these REITs don’t have a consistent record of growing that distribution. So, the trade-off is you get a higher yield to start, but you won’t get a consistent increase in income.

Northview Apartment REIT

For example, from a year ago, Northview Apartment REIT is down from $27 to $18, a drop of over 33%. Well, it turns out most of its properties are situated in resource provinces, and resources haven’t been doing well to put it kindly.

25% of its revenue comes from Nunavut, 22% comes from Alberta, and 21% comes from the Northwest Territories. Although its share price has done horribly this year, Northview Apartment REIT (formerly known as Northern Property REIT under the ticker TSX:NPR.UN) has at least maintained its monthly distributions since 2002.

With a payout ratio of around 70%, there’s some margin of safety for its 8.9% yield.

NorthWest Health Prop Real Est Inv Trust

NorthWest Healthcare Properties REIT is a specialized office REIT in that it owns and receive rent from hospitals and clinics. The growing aging population around the world serves as its tailwind. Its properties can be found in Canada, Brazil, Australasia, and Germany.

NorthWest Healthcare Properties REIT has a payout ratio of 95%. So even though its yield of over 9% is enticing, shareholders should keep an eye on its occupancy rate which sits at 94%.

Dream Global REIT

Dream Global REIT owns office and commercial properties in Germany. So if you’re looking for an investment with foreign exposure, Dream Global REIT maybe a good candidate. Its properties can be found in 7 of Germany’s major office markets: Hamburg, Berlin, Munich, Stuttgart, Frankfurt, Cologne, and Dusseldorf.

Since its initial public offering in 2011, it has maintained its distribution. With a payout ratio around 86%, its distribution seems safer than that of NorthWest Healthcare Properties REIT.

Dream Office Real Estate Investment Trst

Dream Office REIT gets 26% of its NOI from Alberta, 18% from Calgary and 8% from Edmonton. Additionally, its $3.1 billion debt matures in 4 years on average. With interest rates expected to head higher, the debt can cause extra burden on the office REIT.

Canadian REITs with 4-6% Yields

Canadian dividends usually can be found in the sweet spot of 3-5%. These Canadian REITs fit nicely in that sweet yield range. In my opinion, they offer lower yields than the group above, but are of higher quality and less risky.

REIT Industry Yield Price Market Cap Debt/Cap
BEI.UN Residential REIT 4.3% $47 $2.2B 34%
REF.UN Diversified REIT 4.3% $42.4 $3.1B 35%
PLZ.UN Retail REIT 5.5% $8.31 $418M 48%

Prices, yields, and market caps based on November 24, 2015 closing prices.

Boardwalk REIT

Other than Northview Apartment REIT, Boardwalk REIT (TSX:BEI.UN) is another residential REIT I own that also has properties in resource provinces. 65% of its net operating income (NOI) comes from Alberta. It only yields around 4.3% right now, but it has also fallen from $68 to $47 in the past year, close to a fall of 31%.

Right now, any stock directly or indirectly related to resources have done poorly in the last year as an investment. However, I can see the strength in Boardwalk REIT’s business as it has maintained an occupancy rate of above 96% at the end of September 2015.

In this Fool Canada article, I wrote about low oil prices haven’t impacted Boardwalk REIT much so far other than on a couple Albertan cities: Fort McMurray, and Grande Prairie.

Canadian REIT

Canadian REIT (TSX:REF.UN) is a diversified REIT that receives about 50% of net income from retail properties, 25% from industrial properties, and 25% from office properties. The diversified asset classes allow the quality REIT to remain stable while growing.

The REIT has maintained occupancy rates of above 95% since 1994. As well, it has increased distributions every year since 2002. With a payout ratio of around 60%, Canadian REIT’s monthly distribution is the safest in Canada.

As a shareholder, I’m also pleased that over 90% of Canadian REIT’s employees own shares in the company. So that their interests are aligned with mine.

Canadian REIT is not a high-flyer, but a conservatively-run business, and you will get your 4.3% income from it.

Plaza Retail REIT

Plaza Retail REIT is both an owner and developer of retail properties. It owns over 300 properties across 8 provinces. However, you might not have heard of it because it is relatively small compared to big guys like RioCan Real Estate Investment Trust (TSX:REI.UN).

On its corporate website, it states: “Plaza Retail REIT’s primary goal is to deliver reliable and growing cash distributions to unitholders from a diversified portfolio of retail properties.”

That’s why I believe Plaza Retail REIT can be a good fit as a part of a diversified REIT income portfolio because it has lived up to its words, and has increased distributions every year for over a decade!

Reinvest REIT Yields for Higher Income

You will be thrilled to know that you can reinvest dividends at discounted prices of up to 5% for some REITs and other Canadian dividend stocks.

Here are the Canadian stocks that offer dividend reinvestment discounts.

Tax on REIT income

If you’re buying REIT units in a TFSA or RRSP, you do not need to worry about the rest of this section. However, if you want to learn about REIT distributions’ tax-advantaged nature, read on.

REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.

On the other hand, the return of capital portion reduces your adjusted cost basis. This means that that portion is tax-deferred until you sell your units or until your adjusted cost basis turns negative.

So, if you buy REIT units in the non-registered account, you’ll need to track the change in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.

Of course, each investor will need to look at their own situation. For example, if you have room in a TFSA, it doesn’t make sense to have investments in the non-registered account to be exposed to taxation.

In Conclusion

Canadian REITs can increase the income of your portfolio, especially the ones with yields of 9% or higher. However, investors should exercise risk management that suits their levels of comfort. If you’re one who can only sleep well by sticking to quality, so be it.

Investors can use the income from REITs to buy higher growth investments such as other Canadian dividend stocks.

If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.

Disclosure: At the time of writing, I am long all REITs above except TSX:REI.UN.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

Get Exclusive Articles from me on Seeking Alpha

  • Access my portfolio of high-quality U.S. and Canadian dividend stocks.
  • Real-time updates of when I buy or sell from this portfolio.
  • Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.
Learn More