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2 REITs for growth and income

Here are two REITs to buy. One is focused on residential properties; the other has a portfolio of office, retail, industrial and residential properties.

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Here are two REITs–one residential, the other mixed–offering unit-holders both growth and income.

CAP REIT (TSX—CAR.UN)

Despite the impact of the COVID-19 pandemic on its business and markets, CAP REIT performed well in the first quarter. Occupancies remained strong and stable at 97.3 per cent, though they were down from 98.2 per cent in the first quarter of 2020. Average monthly rents, meanwhile, rose 0.9 per cent to $1,115. And the REIT saw solid growth in key performance benchmarks.

Canadian Apartment Properties Real Estate Investment Trust, or CAP REIT, is Canada’s largest publicly-traded provider of rental housing. The REIT currently owns or has interests in, and manages, about 67,600 residential apartment suites, townhomes and manufactured housing community sites across Canada, in the Netherlands and Ireland.

Normalized funds from operations, or NFFO, is the key measure of the REIT’s performance. For the three months ended March 31, 2021, CAP REIT’s NFFO was $95.9 million, or $0.56 a unit, compared with $93.1 million, or $0.55 a unit, in the same period of 2020.

The increase was due primarily to the contribution from acquisitions, continuing stable occupancies, increased average monthly rents and a focus on operational efficiency.

The distribution to NFFO payout ratio improved to 62.3 per cent from 63.3 per cent. That means NFFO more than adequately covers the monthly cash distributions, ensuring their strength and stability.

As the economy recovers, CAP REIT stands to profit from further acquisitions, a focus on strong suburban markets, rebounding immigration and the return of international students to Canada, as well as the increasing size of the seniors population.

The REIT will probably earn $2.35 a unit in NFFO in 2021. The units trade at a high 26.3 times that figure, reflecting the premium multiple attached to apartment REITs and their stable cash flow and lower risk. The annual distribution of $1.38 a unit yields 2.2 per cent.

CAP REIT is a buy for growth and some income.

H&R REIT (TSX—HR.UN)

H&R’s development portfolio in the US currently comprises five residential developments with a total budget of US$241.6 million. The REIT’s largest current development project is River Landing, an urban in-fill mixed-use development in Miami, Florida, which is adjacent to the health district, with about 1,000 feet of waterfront on the Miami River, two miles from downtown Miami.

H&R REIT is one of Canada’s largest real estate investment trusts with total assets of about $13.2 billion. The REIT has ownership interests in a North American portfolio of office, retail, industrial and residential properties comprising over 40 million square feet.

For the three months ended March 31, 2021, H&R’s funds from operations (FFO) were $119.7 million, or $0.40 a unit, compared with $136.1 million, or $0.45 a unit, in the same period of 2020.

The decrease was due to a 4.9 per cent drop in property operating income to $133.7 million. The main reason for this was weakness in the retail segment caused by factors related to the pandemic.

These factors included tenant closures affecting enclosed shopping malls, temporary lease amendments reducing rental rates to retain tenants who faced challenging conditions, and lower percentage rent and specialty leasing earned due to government mandated closures primarily affecting enclosed shopping malls.

H&R continues to advance its strategic initiatives. In the past year, the REIT has completed substantial dispositions and acquisitions, completed developments and advanced future development projects which will start in 2021 and 2022. Plus, it expects to complete further property dispositions in the remainder of 2021. These activities are meant to unlock unit-holder value, as the units trade a substantial discount to their net asset value of $22.24.

H&R trades at 10.1 times the $1.65 a unit that the REIT is forecast to earn this year. Its annual distribution of $0.69 a unit yields 4.1 per cent. H&R REIT is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the August 13, 2021 issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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