Kalkine Media - In 2024, the anticipation of interest rate cuts is causing a stir in the real estate sector. While the exact timing of rate cuts remains uncertain, many debt-heavy companies, especially real estate investment trusts (REITs), are eagerly awaiting clarity from the Bank of Canada. Despite the waiting game, investors might miss out on the recovery rally of fundamentally strong TSX real estate stocks.
What to Expect from Real Estate Stocks in 2024:
The real estate sector is highly sensitive to interest rates, particularly REITs that utilize mortgages and credit for property acquisition, development, and intensification to earn higher rent. The recent surge in interest rates led to increased interest expenses for REITs, outpacing their rental income growth. This financial stress, combined with a drop in property demand and prices, resulted in a decline in the unit prices of many REITs.
Now, with the potential reversal of the interest rate trend, the real estate segment could experience an upturn in stock prices.
CT REIT:
CT REIT (TSX:CRT.UN) has witnessed an 18% decline in its stock since the interest rate hike began in April 2022. Despite increased interest expenses, the REIT demonstrated resilience by maintaining a distribution payout ratio below 75%, ensuring healthy cash flow. CT REIT's parent, Canadian Tire (TSX:CTCa), contributes 91.3% of its rent, providing stability. The REIT avoids excessive use of mortgages for development projects, using working capital instead.
While it faced a temporary increase in interest expense due to a short-term credit facility for an intensification project, more than 90% of its projects are already occupied, promising future rental income. With a commitment to distributing 100% of taxable income to unitholders, CT REIT is positioned for distribution growth in 2024. The current discount in its stock price and a 6.1% distribution yield make it an attractive investment opportunity.
RioCan REIT:
RioCan REIT (TSX:REI.UN) experienced a 24% decline in its stock during the interest rate hike cycle. Unlike CT REIT, RioCan has a diversified tenant base, with no single tenant contributing more than 5% of its rental income. The REIT, having adjusted distributions during the pandemic, maintains a comfortable payout ratio of around 50%.
High-interest rates impacted RioCan's net profit, leading the management to refrain from new major construction projects until construction financing conditions improve. Instead, the REIT prioritizes repaying existing debt, focusing on projects with secured funding. While this move preserves capital in the short term, it positions RioCan for future growth when financial conditions improve and property prices rebound. The REIT's significant presence in the Greater Toronto Area, known for higher rent, enhances its growth potential.
Investors may find value in RioCan REIT as financial conditions improve, potentially driving a surge in its stock price.
In conclusion, the potential reversal of interest rate trends in 2024 offers an opportunity for real estate stocks to recover and thrive. CT REIT and RioCan REIT, with their strategic positions and growth prospects, present compelling investment options for those eyeing the real estate sector.