2 REITs to buy for growth and income

Here are two REITs to buy for growth and income. They own a mix of residential, retail, office and industrial properties.

H&R Real Estate Investment Trust (TSX—HR.UN)

H&R’s rentals from investment properties fell 4.4 per cent in 2020. That’s because the REIT has sold about $1.0 billion of its assets in the past two years. Meanwhile, it made just $218.1 million of acquisitions over the same period. It’s all part of its plan to fund ‘value-creating’ developments through property dispositions, expand its residential rental platform and strengthen its balance sheet.

H&R Real Estate Investment Trust (REIT) has ownership interests in a North American portfolio of high-quality office, retail, industrial and residential properties comprising over 40 million square feet.

For the year ended Dec. 31, 2020, H&R’s funds from operations (FFO) were $503.1 million, or $1.67 a unit, compared with $529.1 million, or $1.76 a unit, in 2019.

Property operating income dropped 6.7 per cent to $663.7 million, due to bad debt expense caused by COVID-19, which predominantly impacted the retail segment.

Financial results also included significant fair value adjustments recorded in the first quarter. The reasons for this include the acceleration of challenging conditions in the retail landscape impacting the valuation assumptions of retail properties.

Management is committed to addressing the significant discount at which H&R’s units trade with respect to its net asset value of $21.92. This may include the creation of new public entities with more narrowly defined mandates.

H&R should earn $1.66 a unit in FFO in 2021. The units trade at just 9.0 times that estimate. Their distribution of $0.69 a unit yields 4.6 per cent.

H&R REIT is a buy for growth and income.

RioCan Real Estate Investment Trust (TSX—REI.UN)

The pandemic has had unparalleled effects on RioCan’s business, including in the areas of rent collection, tenant restructuring and fewer consumer transactions. Despite this, the REIT achieved its 2020 funds from operations (FFO) per unit guidance in the $1.60 range. But it felt it had to reduce its distribution by 33 per cent to optimize capital allocation towards value creation opportunities such as development, debt repayment and unit buybacks.

RioCan is one of Canada’s largest real estate investment trusts, or REITs. It owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density transit-oriented areas where Canadians want to shop, live and work.

For the year ended Dec. 31, 2020, RioCan’s funds from operations (FFO) were $507.4 million, or $1.60 a unit, compared with $575.8 million, or $1.87 a unit, in 2019. The decrease was primarily driven by $42.5 million in pandemic-related provision and $20.8 million lower residential inventory gains due to timing of condominium closings.

Same property net operating income (NOI) fell 6.5 per cent, mainly due to the pandemic-related provision. Excluding the provision, same property NOI would have dropped 2.6 per cent, reflecting other effects of the pandemic on property operations such as occupancy.

RioCan says its development program is poised to deliver new and diversified sources of income and cash flow from development completions with more to come given its large pipeline. This, it adds, will let it raise its distributions once the economy recovers and the pandemic dissipates. Rental properties, condominiums and townhomes remain a cornerstone of the REIT’s development program.

RioCan REIT trades at 12.7 times its likely 2021 FFO of $1.60 a unit. That’s about a 15-per-cent discount to its peer group. It annual distribution of $0.96 a unit yields 4.7 per cent. RioCan REIT is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the April 30, 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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