REITs, also known as Real Estate Investment Trusts, are companies that pool funds from different investors to purchase real estate. These are popular with investors because real estate is one of the most profitable investments. This is one way investors can invest in real estate without actually dealing with the process of purchasing and selling themselves.
How REITs Work
REITs are structured investments that are similar to mutual funds. The difference is that they don’t hold stocks like mutual funds do. They hold real estate investments. It allows investors to invest in real estate in a non-traditional way.
REITs can come in a variety of sizes, just like mutual funds. However, there are a variety of REIT types that can influence the size, accessibility, and price of a REIT.
Different Types of REITs
REITs can be broken down into 3 categories. These categories include:
- Publicly-Traded REITs
- Public Non-Traded REITs
- Private Non-Traded REITs
The most common type of REIT is the publicly traded REIT. These trades, such as stocks and other types of investments, are found on the TSX (Toronto Stock Exchange) or the NYSE (New York Stock Exchange). These can be bought and sold by any investor and are also available as Canadian REIT ETFs.
Public Non-Traded REITs can also be bought and sold by any investors, but they don’t trade on any exchanges. If you’re looking for these types of REITs, they can only be purchased by real estate crowdfunding platforms. Private Non-Traded REITs also don’t trade on exchanges. However, only high-net-worth investors can purchase them.
If you’re looking to invest in REITs, it’s important to note that within these 3 categories, there are plenty of other subcategories. Let’s take a look.
Mortgage REITs
These types of REITs are quite common, and they operate on a pretty simple basis. These are the REITs that give loans and mortgages to real estate developers. These types of REITs earn income from the interest on the loans. Interest rates can significantly affect these REITs.
Equity REITs
These are the most complex types of REITs, and there are actually 12 categories into which this type of REIT is broken.
- Data Centre REITs
- Diversified REITs
- Healthcare REITs
- Industrial REITs
- Infrastructure REITs
- Office REITs
- Retail REITs
- Residential REITs
- Self-Storage REITs
- Speciality REITs
- Timberland REITs
- Hospitality REITs
These types of REITs make their money by renting out space, not just urban office space. As you can see, each sector focuses on different types of rentals, including infrastructure-related real estate assets. There are also plenty of REITs that own medical offices, office buildings, warehouses, shopping malls, and other popular buildings and retail spaces that can produce monster returns for property owners and investors.
Hybrid REITs
Hybrid REITs earn money in the real estate sector from a combination of rental income and interest income. This means that these types of REITs both lend money to real estate developers and rent out various types of real estate spaces.
How To Invest in REITs in Canada
In Canada, purchasing REITs is similar to purchasing traditional investments. When it comes to Publicly Traded REITs, you can purchase them on the exchange through a broker, whether they’re high-yield or not. This is a pretty simple process that can be done through a traditional or online brokerage account. These are also the most affordable REITs that you can purchase.
Publicly non-traded REITs can also be purchased using a brokerage; however, it can be a little more difficult. They also tend to be more expensive and have higher fees since they’re much more difficult to sell. No matter which ones you choose, though, any profits made are considered as net income and part of your annual taxable income.
Best Canadian REITs
Now that we’ve gone over what REITs are, how they work, and the types of REITs, we can take a look at which ones are the best. These are some of the best ones you can currently invest in in Canada. REIT ETFs seek exposure to REITs.
Morguard North American (TSE:MRG.UN)
This particular REIT, Morguard North American Residential REIT, is a diversified portfolio of rental properties across major Canadian cities and around the world. It’s made up of 16 residential properties containing apartments in Canada, 26 residential apartment buildings in the US and one retail property in the US. It was created to produce stable, tax-efficient income for investors in the funds, since you would pay capital gains tax on any earnings. Here are some stats for the fund itself.
| Price | $14.89 |
| Market Cap | $1.033 Billion |
| Forward Dividend & Yield | 5.36% |
| Trailing Dividend Yield | 5.20% |
| ROE% | 5.02% |
| Free Cash Flow 2025 | $80.60Million |
Smartcentres (TSE:SRU.UN)
This large Canadian REIT is a fund that deals in both commercial and residential real estate. They have over 174 different properties throughout the country. This REIT makes their income from rental properties, not from lending to real estate developers.
| Price | $26.65 |
| Market Cap | $5.232 Billion |
| Forward Dividend & Yield | 6.99% |
| PE Ratio | 28.99 |
| Volume | 81,049 |
| Average Volume | 314,059 |
Allied Properties (TSE: AP.UN)
Allied Properties has a large real estate portfolio involved in the development, management, and ownership of properties across the country, with a focus on major Canadian cities. They primarily invest in retail properties with a focus on IT, banking, government, marketing and telecommunications.
| Price | $7.87 |
| Market Cap | $1.634 B |
| Volume | 265,302 |
| Average Volume | 631,456 |
| Forward Dividend & Yield | 9.36% |
| PE Ratio | N/A |
Granite REIT (TSE:GRT.UN)
Granite is a real estate trust that focuses on industrial properties in North America and Europe. It includes a wide range of manufacturing facilities that make up a large portion of its income. Here are the stats when you’re looking to buy stocks.
| Price | $83.77 |
| Market Cap | $5.2 B |
| Volume | 15,620 |
| Average Volume | 85,396 |
| Forward Dividend & Yield | 4.23% |
| PE Ratio | 13.84 |
Canadian Apartment Properties REIT (TSE:CAR.UN)
This REIT focuses on acquiring and managing apartment and townhome complexes across the country. The types of real estate they focus on are mid-tier and luxury, which make up a large part of their income. Like the others, their income is mainly rental income.
| Price | $31.63 |
| Market Cap | $4.867B |
| Volume | 184,040 |
| Average Volume | 425,754 |
| Forward Dividend & Yield | 4.93% |
| PE Ratio | N/A |
CT REIT (TSE: CRT.UN)
CT is a small Real Estate Investment Trust that focuses on investing in various real estate assets across Canada. The largest portion of its income comes from the buildings CT Reit owns and leases to the Canadian Tire Corporation. That said, they also have a wide range of other properties as well.
| Price | $16.80 |
| Market Cap | $4.016 Billion |
| Volume | 56,467 |
| Average Volume | 245,988 |
| Forward Dividend & Yield | 5.83% |
| PE Ratio | 8.75 |
Automotive Properties REIT (APR-UN.TO)
This REIT is what’s considered an open-ended real estate trust. They focus on purchasing income-producing automotive properties. This is a Canadian company that focuses on acquiring other Canadian properties.
| Price | $11.74 |
| Market Cap | $657.746 Million |
| Volume | 25,563 |
| Average Volume | 41,658 |
| Forward Dividend & Yield | 7.17% |
| PE Ratio | 10.50 |
Dream Industrial REIT (DIR-UN.TO)
The Dream Industrial REIT owns and manages over 339 industrial assets across Canada, the US and Europe. They currently have a decent portfolio and are continuing to grow. Here are some stats regarding this REIT.
| Price | $12.65 |
| Market Cap | $3.3733 B |
| Volume | 275,540 |
| Average Volume | 569,232 |
| Forward Dividend & Yield | 5.65% |
| PE Ratio | 21.81 |
Overall, what is the Best REIT ETF in Canada
There are plenty of different real estate investment trusts to choose from. It can be difficult to find the best REIT overall. That said, one of the most popular and most recommended REITs is the Allied Properties REIT, which we’ve already discussed above.
Largest REITs in Canada
In Canada, the largest residential REIT is the Canadian Apartment Properties REIT. In total, the company manages over 67,000 properties throughout Canada, Ireland, and the Netherlands. This REIT is expected to continue growing, which not only makes it the largest residential REIT but also a great investment.
SmartCentres is Canada’s largest retail REIT by market capitalization. This company owns many properties used by some very large companies. In fact, the biggest client of this company is Walmart.
REITs By Market Cap
As we mentioned, there are many Real Estate Investment Trusts in Canada. While we have gone over many of them, they look different when you compare them. Let’s take a look at the best REITs in Canada, along with their market caps.
| Real Estate Investment Trust | Market Capitalization |
| Morguard North American (TSE:MRG.UN) | $1.033B |
| Automotive Properties REIT (APR-UN.TO) | $657.746M |
| CT REIT (TSE: CRT.UN) | $4.016B |
| Canadian Apartment Properties REIT (TSE:CAR.UN) | $4.876B |
| Granite REIT (TSE:GRT.UN) | $5.2B |
| Allied Properties REIT(TSE:AP.UN) | $1.634B |
| Smartcentres REIT(TSE:SRU.UN) | $5.232B |
| Dream Industrial REIT (DIR-UN.TO) | $3.3733B |
Highest Paying REITs
When you’re looking into the top Canadian REITs, it’s important to also look at what these REITs pay. Many investors look at which REITs in Canada pay the highest dividends and how much they pay. However, it’s also important to pay attention to consistent dividend growth.
| Real Estate Investment Trust | Dividend Yield |
| Morguard North American (TSE:MRG.UN) | 5.36% |
| Automotive Properties REIT (APR-UN.TO) | 7.17% |
| CT REIT (TSE: CRT.UN) | 5.83% |
| Canadian Apartment Properties REIT (TSE:CAR.UN) | 4.93% |
| Granite REIT (TSE:GRT.UN) | 4.23% |
| Allied Properties REIT(TSE:AP.UN) | 9.36% |
| Smartcentres REIT(TSE:SRU.UN) | 6.99% |
| Dream Industrial REIT (DIR-UN.TO) | 5.65% |
Based on this information, the REIT with the highest dividend yield is the Allied Properties REIT. Other numbers you could also pay attention to in discovering the yield are the dividend payouts relative to the FFO payout ratio.
FFO and AFFO: How Do They Differ?
When you’re dealing with REITs, there are two important terms that you need to know. The first is FFO, which stands for Funds From Operations. This measures the operating cash flow of an REIT by adding back depreciation to net income.
AFFO stands for Adjusted Funds From Operations, which is more defined than FFO, as it excludes recurring maintenance capital expenditures and adjusts for straight-line rents. You might be wondering, though, why this matters.
Well, FFOs can make a dividend look safer because they ignore the cash required to keep the building operational. The AFFO is a more realistic number that reflects the actual costs.
How do Payout Ratios Measure REIT Distribution Sustainability?
Traditional payout ratios don’t work for REITs because non-cash real estate depreciation will artificially depress net income, thereby distorting payout ratios. This is why FFO payout ratios and AFFO payout ratios are used instead.
When you do a payout ratio analysis, you are looking for a ratio of 70% to 85% to be in the healthy range when using FFO. You calculate this by dividing the dividends paid by funds from operations. This same formula can be used for the AFFO payout ratio, but the healthy range is 65% to 80%.
Why a High REIT Yield Can Signal Trouble
A high REIT yield can be a warning sign that a company’s share price has dropped because investors expect a distribution cut or business stress. It is commonly known as a yield trap. When you look at the mechanics of a high-yield, it makes more sense.
When the market price of an REIT drops, the yield automatically rises. The given distributions also reflect past success, so they offer no insight into the future. While a traditional P/E is used for other investments, a price-to-FFO ratio is more accurate for a REIT.
How Should Investors interpret discounts to Net Asset Values?
A discount to Net Asset Value (price-to-NAV discount), also known as NAV, occurs when an investment vehicle, such as a REIT, trades on the market for less than its NAV per unit. It benefits you to purchase assets because your profit increases as the discount narrows over time. You can also generate higher yields when you purchase at lower prices.
Distribution Safety: How it is Impacted by Debt Levels and Maturities
With investments like REITs, the safety of distributions is directly linked to how a company’s debt is structured on its balance sheet. The debt levels that a company holds will dictate its financial obligations. In fact, their distributions are paid through FFOs. High debt levels lead to higher interest payments, which reduce the cash flow available to cover distributions.
When it comes to debt, many agreements include strict clauses. If a company’s profits dip and it is unable to cover costs, such as net operating income, and it risks breaking the clause, the lender is legally able to block it from distributing payments to shareholders.
The maturity of the company’s debt can create a rollover or refinancing risk. This occurs when a company has a large amount of debt and its maturity date occurs during a high-interest period. That debt has become more expensive and can significantly impact cash flow allocated for distribution, given the much higher debt-to-book-value ratio.
Another time that maturity can impact distributions is during a recession. If a company has immediate maturities but is unable to find lenders, it needs to conserve every dollar to reduce its debt-to-EBITDA ratio. In most cases, distributions will stop to conserve funds.
The most successful companies are those with a staggered debt maturity schedule. Their interest coverage ratio is smaller, making them more desirable to lenders.
How REIT Distributions are Taxed in Different Accounts
When you invest in REITs, the amount you pay in taxes will vary depending on the type of account in which they are held.
Non-Registered Accounts
Anything held in non-registered accounts can either be taxed at your marginal tax rate or at the capital gains tax rate. If the income is from rentals or ordinary income, then it will be taxed at your marginal tax rate. Foreign income is taxed the same way; however, it can be offset by eligible foreign tax credits. There may also be the foreign REIT withholding tax. Anything else is capital gains, and can be taxed using the tax rate you qualify for.
Registered Accounts
When it comes to registered accounts, you can hold your REITS in TFSAs, FHSAs, RRSPs, and RRIFs. Your registered account’s taxation depends on which account you invest in.
TFSAs: When you invest in a TFSA, all of your income earned is tax-free. However, you do need to stay within your contribution limits to avoid a penalty. That said, you can withdraw from your TFSA at any time without a penalty.
FHSA: A First-Home Savings Account allows you to avoid paying tax on your returns. However, you also don’t pay taxes on the initial funds you contribute to the account. As long as the funds are used to purchase your first home, you won’t have to pay taxes at all.
RRSP/RRIF: With an RRS, P all of your contributions are tax-deferred. This means that no amounts are paid until you start withdrawing. You will then either have to pay a withholding tax or make annual income-tax payments at your new marginal tax rate, when it’s converted into an RRIF
.
Should REITs be Held in a TFSA or an RRSP?
While both RRSPs and TFSAs can be great investment tools, for REITS, a TFSA is usually the preferred option. This is because all of your distributions grow tax-free, nd the withdrawals don’t trigger any future tax payments.
Because REIT profits are usually considered as other income (regular income), they can be taxed heavily in non-registered accounts. Keeping them in a TFSA gives you access while still maintaining tax-free growth.
What Happens When an REIT Cuts Distribution?
When there is no distribution sustainability and an REIT cuts its distributions, a few things happen. Share prices drop, cash flow declines, there are signs of distress, and sectors re-rate.
REIT ETFs or Individual REITs?
While both REIT ETFs and individual REITs are good choices, each is better for different reasons. One is better for diversification, and the other is better for targeted high yields.
REIT ETFs are generally low-risk, more diversified, can be held in either a passive index fund or an active fund, have low expense ratios, and have average yields. Individual REITs, on the other hand, are high-risk, more concentrated, managed internally, subject to standard brokerage fees, and offer higher yield potential.
What Distinguishes XRE, ZRE and VRE?
While all of these are REIT ETFs, there are many differences between them.
| Feature | XRE | ZRE | VRE |
| Index | S&P/TSX Capped REIT Index | Solactive Equal Weight Canada REIT Index | FTSE Canadian Capped REIT Index |
| Weighting Strategy | Market-cap weighted (capped at 25%) | Equal-weighted (4% per holding) | Market-cap weighted (capped) |
| Number of Holdings | 16 to 19 | 23 | 18 |
| Approx. Management Expense Ratio | 0.61% | 0.61% | 0.38% |
Transparent Ranking Criteria and Scoring Methodology
When it comes to REITs, different scoring components are used. These include a business profile that assesses quality, tenant diversification, and even market positioning. However, you also need to measure the capital structure flexibility and other parts of the financial profile.
Other factors weighed include management track record, disclosure transparency, and ESG reporting standards. When it comes to the framework, though, each thing is weighted differently.
- Portfolio Quality is 40%
- Financial Leverage is 35%
- Governance and Disclosure is 15%
- Sustainability is 10%
Canadian REIT Benchmark Compared to Total Returns
When comparing total returns, we see that many have lagged broader equity total returns due to high interest rates and pandemic pressures. The total returns aren’t the only thing you need to consider, though. It’s also important to look at:
- Distribution cut history
- Annualized returns
- Return of capital
- Adjusted cost-based tracking
- Capital expenditures
- Unencumbered assets
- Variable rate exposure
- Fixed-rate debt
Tenant Concentration, Occupancy and Lease Comparison
When looking into REITs, the tenant mix makes a big difference. The tenant concentration, occupancy rate, and weighted-average lease term will impact cash flow, stability, and risk. For example, those with lots of tenants, better rent collection rates, and rental spreads that allow for lease renewals are likely to have a better capitalization rate than another with the same NOI.
Operating Income and Rental Growth on the Same Property
Your net operating income measures a property’s profitability after you subtract operating expenses from the revenue. Your rental growth, on the other hand, measures the increase in lease rates year to year.
- Gross Revenue: This is your total rent and income that’s collected.
- Operating Expenses: These include costs such as taxes, insurance, and maintenance.
- NOI: Net Operating Income, which is revenue minus operating expenses.
- Rental Growth: Increases in contractual or market rent over time.
How to Get a Return on Capital Using the Adjusted Cost Base
What’s known as Return on Capital is a distribution from a REIT that gives back a portion of your original investment instead of paying out taxable income. Since it’s not considered to be a profit, you don’t have to worry about distribution tax treatment or T3 slip reporting. That said, it does reduce your adjusted cost base, which will defer your tax obligation until it is sold.
How Distribution Reinvesting Plans and Compounding Work
A Dividend Reinvestment Plan, also commonly known as a DRIP, uses the cash distributions from your investments, which include REIT index funds, to purchase more shares without having to pay any commission fees. These transactions are automated and done by the brokerage.
Where the shares are placed is up to you. You can choose to place your RRSP account or put your REITs in a TFSA. The management fee structure and monthly distribution schedule are dependent on what you invest in.
Office Conversions and the Work From Home Shift
While real estate investing and REITs like RioCan REIT and Choice Properties REIT are still great investments, there is a sector concentration risk in office real estate due to office conversion projects and work-from-home impacts. There are also industrial vacancy trends to consider.
Final Thoughts
If you’re looking into investing in REITs, there are so many things to consider, like:
- Rent control exposure
- Development pipelines
- Currency exposure
- Ranking methodology
- US REIT exposure
- Grocery-anchored retail
- Seniors housing demands
- Data centre growth
- Immigration and rental demands
- Unit buyback programs
- Internal vs external management
- Private REIT redemption limits
If you’re unsure where to start, the best thing to do is to speak with an investment advisor. They can help you find the best fit.
