Canadian REITs Can Help Investors Build Passive Income. Here’s Two That Proves It

Housing and Real Estate - Photo by Paul Kapischka on Unsplash

Canada’s real estate market remains active despite existing home sales falling below the 10-year moving average and home prices continuing to move sideways against the backdrop of the much-anticipated interest rate cut announced by the Bank of Canada over a month ago. 

Though some real estate markets continue to see average listing prices sitting at their highest ever-recorded levels, smaller, and less-attractive markets have seen modest declines in listing prices, although this hasn’t come with a resurgence in buyer activity. 

Would-be buyers and those households looking to upgrade to something bigger have been dealt some relief after the country’s central bank cut its prime lending rate by 0.25% in June, marking the first rate cut in over three years, and making the Bank of Canada the first of the G7 nations to lower interest rates. 

While analysts are expecting the bank to bring forth more rate cuts before the end of the year, overall the real estate market is beginning to enter what could become a slow, but gradual return to normalcy, and perhaps pre-pandemic performance. 

Impressive H1 Activity

Given the wider market conditions, the first leg of the year has seen a handful of publicly traded real estate investment trusts (REITs) posting positive performance activity on the back of an already challenging economic landscape. 

Analysts reported that Canadian REITs collected a robust $880 million (CAD$ 1.20 billion) via capital offerings during the first three months of the year, which was a strong improvement of 26.2% compared to the previous quarter. In Q4 2023, REITs raised about $690 million (CAD$ 950.9 million) through capital offerings. 

Throughout the first several months, the retail sector gave investors and analysts the biggest surprise of all, seeing over $550 million in capital funding for the first quarter. Other property segments such as the industrial sector collected nearly $150 million in capital during the same recorded period.

Similar to other real estate segments, the retail market sector has witnessed a decline in the availability of space while rents have gradually been increasing. Though investment volumes have recovered to pre-pandemic levels, sub-sectors such as power centers and strip centers have seen rental prices outpace inflation, while other sub-sectors, including general retail and malls, fall below inflation levels. 

Overall, the steady improvements show that there is enough steam left in Canada's real estate market to power through towards the end of the current economic cycle. Despite strong demand, and even stronger price gains in most major real estate markets across the country, the current level of activity could help provide some more positive returns over the coming months, helping bolster wider REIT performance and fueling a potential bullish outlook. 

Building Passive Income With REITs

Being just over halfway through the year, there’s still a lot of time for investors to load up on Canadian real estate investment trusts to help bolster their portfolios and provide them with some much-needed sustainable growth. 

Looking at current conditions, it’s perhaps clear that there are plenty of REITs that can offer investors substantial returns, however only a handful of them can help investors create passive income as the real estate market continues to recover. 

Canadian Apartment Properties 

Starting off, Canadian Apartment Properties (TSX: CAR-UN) is currently one of the largest publicly traded rental housing investment trusts, with roughly 64,022 residential apartments, townhouses and manufactured home community sites across Canada and the Netherlands. 

In Q1 2024, CAPREIT reported an overall steady three months, with residential occupancy nearing 98.4%, while total monthly rent averaged $1,552.00, which was significantly lower compared to the broader national average, which currently sits at $2,188.00 per month, an increase of 8% since April 2023. 

Though the company has an impressive real estate portfolio, investors are more focused on current, and forward-looking financial guidance. For the first quarter, the company had a strong liquidity position, with $369.3 million in available liquidity, and reported over $44.6 million in cash and cash equivalents. 

Operating revenues came in at $275 million versus $260 million in Q1 2023. Total net operating income (NOI) of $177 million was a steady increase compared to $163 million for the same period last year. Total NOI increased from 62.8% in Q1 2023 to 64.2% in their recent reporting period. 

Elsewhere, funds from operations (FFO) were slightly higher, with FFO per unit (diluted) for the quarter ending at $0.609 versus $0.567 in Q1 2023. Current distribution levels have remained the same month over month, with July’s monthly distribution ending at $0.12083. Last year the company paid $1.450 in total dividends, and forward-looking projections estimate that these levels will be sustained for the coming months. 

CAPREIT has a low-risk rating, and with a yield of 2.9%, provides sustainable growth for investors seeking to create more equal spreads in their portfolio while seeking more consistent returns month over month. 

More than this, investing in Toronto real estate, one of Canada’s most active and expensive property markets, has become increasingly challenging for many first-time buyers and would-be investors. However, CAPREIT has capitalized on this active market opportunity, with the majority of its portfolio, around 46.3% invested in active sites in Ontario. Other noticeable holidays include Quebec, which makes up 15.2%, British Columbia at 14% and the Netherlands makes up about 15% of their portfolio. 


Second to residential real estate is the retail and commercial market which is currently seeing a strong rebound from previous declines. RioCan Real Estate Investment Trust (TSX: REI-UN) is currently one of the largest investors, developers, and managers of retail-focused mixed-use properties. 

RioCan invests heavily in the development of retail properties located within high-density neighborhoods, particularly those close to or within high transit-oriented areas. This strategy helps the company capitalize on building a strong network of high-value properties in major metropolitan and urban areas that see continuous activity and steady long-term private and public investment opportunities. 

Additionally, their strategy focuses on blending three important branches. For starters, the company had gradually increased its investment and development of retail properties in six of Canada’s major property markets, including Vancouver, Greater Toronto Area, Edmonton, Calgary, Montreal, and Ottawa, with income improving by 18% in Q1 2024 compared to the same period in 2017. 

Secondly, RioCan operates mostly in high-density areas where population growth has been steady or is expected to see major growth in the coming years. For instance, the company owns 85 assets in the Greater Toronto Area, which accounts for nearly 57% of its property portfolio and equates to more than 16.7 million square feet of rentable space. 

Finally, current active properties are located within strong household income areas. During Q1 2024, RioCan properties were mostly located in areas where the average household income was equal to or greater than $140,000, which represented a 37% increase from the recorded $102,000 household income recorded for the same period in 2017. 

Based on their first quarter reported earnings, RioCan has a strongly diversified property portfolio with retail such as grocery, pharmacy, liquor, and essential services and goods making up the largest share of their portfolio at 20.4% and 24.7%, respectively. Additionally, value retailers, dine-in restaurants, specialty stores, and quick service restaurants are among the third, fourth, and fifth largest portfolio holdings. 

On the financial side, RioCan had a strong first quarter, with revenue performance up 5% compared to the same period last year, and commercial property NOI rose 0.4% during the same recorded period. Elsewhere, FFO per unit (diluted) was 2.3% higher compared to Q1 2023, and the company reported a positive FFO payout ratio of 60.7% which is in line with their expectations for the year and long-term target range of between 55% to 65%.

Then, more importantly, at the beginning of the year, the company announced an increase in monthly distributions, with a 2.8% increase in February, rising from $0.09 per unit to $0.0925 per unit. Currently, total annualized distributions of $1.11 per unit are in line with their forward expectations and are at a consistent and sustainable level compared to their nearest-market competitors. 

Final Thoughts 

Investors may have strayed from the real estate market in recent years, but things might be starting to turn around for them as conditions begin to change and the market sees the ending of the current economic cycle which has largely been dictated by high interest rates and sharp inflation. 

Perhaps the last few months of the year could provide a different outlook for investors, yet the challenges of the past might still be present, it’s possible that going forward conditions could begin to steadily improve and bring much-needed relief over the long term. 

On the date of publication, Pierre Raymond did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.