Falling interest rates in Canada make a compelling bullish case for real estate investments in August 2024. Mortgage rates will decline to make leveraged real estate deals more affordable. Canadian real estate investment trusts (REITs) could do better in a lower interest rate environment, and I'm bullish on two uniquely positioned high-quality TSX REITs to buy this month.

Why invest in TSX real estate sector stocks in August?

Significant rate cuts could be on the horizon, and they may re-ignite investor interest in highly leveraged TSX real estate stocks as borrowing costs decline.

Canada's leading lenders forecast a significant decline in interest rates between the third quarter of 2024 and the fourth quarter of 2025. In an interest rate forecast report compiled by the Colliers International Group in July, major lenders forecast interest rates to decline to ranges by as much as 200 basis points to a range of 3.5% to 2.75% by the fourth quarter of next year.

Real estate market activity could increase as interest rates fall significantly over the next 18 months to kick off a strong rebound in beaten-down Canadian REITs.

The two best TSX real estate sector stocks to buy now

The best TSX real estate sector stocks for income-oriented investors to buy in August include Minto Apartment Real Estate Investment Trust (TSX:MI.UN) and Choice Properties Real Estate Investment Trust (TSX:CHP.UN). Let's take a closer look.

Minto Apartment REIT

Minto Apartment REIT recently released an impressive set of financial and operating results for the second quarter. Falling interest rates could propel trust units towards the most recent net asset value per unit of $22.27, nearly 43% higher, over time.

The residential REIT owns and operates a portfolio of 6,211 rental apartment suites in Canada. Its portfolio generated a normalized same-property net operating income (NOI) growth of 7.5% year over year during the last quarter, supported by growth in average rental rates on new leases, high and steady occupancy rates, and tight expense management.

Most noteworthy, Minto Apartment REIT generated 18.7% more distributable cash flow during the past quarter, and its normalized adjusted funds from operations (AFFO) payout rate improved by 870 basis points to an industry-low 57.2%. The trust's monthly distribution has never been safer, and management has significant room to continue raising distributions.

The REIT has raised its monthly distributions by a cumulative 23.2% since its initial public offering (IPO) in July 2018. The current monthly payout yields a respectable 3.2% annually.

Minto Apartment REIT's interest costs declined by 16.5% year over year during the second quarter. The trust is successfully retiring expensive debt, and its debt-to-gross-book value ratio improved by 100 basis points to 41.8% going into the third quarter. Investors may appreciate the REIT's prospects more as interest rates fall to make financing costs even more affordable.

Choice Properties REIT

Choice Properties REIT is a diversified real estate trust with 702 income-producing properties worth $16.7 billion. Most of its assets are retail properties with Loblaw as an anchor tenant comprising 56% of the REIT's annual income. The relationship enhances cash flow and earnings stability as the trust pivots to industrial and mixed-use industrial developments.

The REIT has a robust property development plan that could get cheaper funding in a lower interest rate environment. It plans to develop 17.2 million square feet of new mixed-use and residential space — or 26% more leasable space compared to its current gross leasable area of 65.9 million square feet.

Portfolio occupancy rates recently improved to 98% from 97.4% a year ago, and the REIT's industrial portfolio was largely responsible for its respectable same-property NOI growth of 4.4% (on a cash basis). Management sees strong embedded income growth from industrial properties where the average market rent of $15.95 per square foot in June was significantly higher than the REIT's in-place rent of $9.32. The trust has room to negotiate for higher rates upon industrial lease expirations.

Meanwhile, the trust pays out a lucrative monthly distribution yielding 5.3% annually. Its AFFO payout rate improved to 77.9% last quarter to give management more room to sustain annual distribution raises. Distribution increases will be much easier if financing costs decline. About 15% of the trust's debt will mature in 2025 and 2026.