2 REITs to buy for growth and income

Here are two real estate investment trusts to buy for growth and income. Both REITS’ units trade at attractive discounts to their net asset values.

Brookfield Property Partners (TSX—BPY.UN)

Brookfield Property Partners faced unprecedented challenges in the second quarter due to COVID-19. Company funds from operations, or CFFO, for the quarter were down nearly 51 per cent year over year.

CFFO was impacted significantly by the widespread closures of the company’s hospitality and retail assets due to the global economic shutdown.

Brookfield Property Partners is one of the world’s premier real estate companies, with about $86 billion (all figures in US dollars unless otherwise noted) in total assets. The company owns and operates iconic properties in the world’s major markets, and its global portfolio includes office, retail, multifamily, logistics, hospitality, self-storage, triple net lease, manufactured housing and student housing.

For the second quarter ended June 30, 2020, Brookfield’s CFFO was $178 million, or $0.18 a unit, compared with $362 million, or $0.38 a unit, in the same period of 2019.

The core office business generated CFFO of $126 million, down 33 per cent from a year earlier. The decrease was primarily attributable to a transaction gain of $38 million in the previous period and a decrease in contributions from parking and retail operations.

Core retail operations CFFO fell 18 per cent to $140 million. Here, results were impacted significantly by widespread mandated closures in the US retail portfolio.

We believe Brookfield’s units are undervalued at their current quotation. The units also possess a high yield. The company’s chief financial officer has said that rather than the distribution being too high, the unit price is too low.

Though its payout ratios are high, we think the company, with the backing of parent Brookfield Asset Management, will probably maintain the current payout.

Brookfield’s units trade at just over a 51-per-cent discount to its net asset value of about C$35 a unit. The annual distribution of C$1.76 a unit yields 10.3 per cent.

Brookfield Property Partners is a buy for growth and income.

Canadian Apartment Properties REIT (TSX—CAR.UN)

Despite the challenges presented by COVID-19, CAPREIT continues to grow and operate well. Occupancies have remained strong and stable, thanks, in part, to the relatively affordable rents the REIT charges. In June, it was able to collect 98 per cent of its Canadian residential and manufactured housing communities rent.

Canadian Apartment Properties (CAP) Real Estate Investment Trust (REIT) is one of Canada’s largest REITs. CAPREIT owns about 56,000 suites, including townhomes and manufactured housing sites in Canada and, indirectly through its investment in European Residential REIT, about 5,600 suites in the Netherlands. It manages about 60,900 of its owned suites in Canada and the Netherlands, and 3,700 in Ireland.

For the six months ended June 30, 2020, CAPREIT’s normalized funds from operations (NFFO) were $187.9 million, or $1.10 a unit, compared with $373.2 million, or $1.03 a unit, in the same period of 2019. The increase was due to the contribution from acquisitions, continuing high stable occupancies, increased average monthly rents, and a focus on operational efficiency.

Revenues rose 16.8 per cent to $436.0 million, thanks to the same factors noted above except for the focus on operational efficiency. Occupancies for the total portfolio remained strong at 98 per cent, while average monthly rents rose 5.1 per cent.

Though occupancies remain strong, they may still be temporarily impacted by COVID-19 over the next several quarters. Nonetheless, CAPREIT appears to be well positioned to strengthen its businesses in most of the markets in which it operates over the long term. The apartment rental business is probably the most defensive space in the real estate sector, and we regard CAPREIT as a core holding in the space.

The units now trade at a 17-per-cent discount to their net asset value of about $53. The current annual distribution of $1.38 a unit yields 3.1 per cent.

CAPREIT is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the October 30, 2020, 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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