The Globe and Mail (BC Edition)

Eight REITs benefiting from falling interest rates

NUMBER CRUNCHER

CFA, MBA Candidate at the University of California, Berkeley, Haas School of Business

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-tobook, and variable debt as a percentage of total debt.

Allied Properties Real Estate Investment Trust, an urban office space developer, topped our screen with an impressive 9.5per-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, 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.