Here are three real estate investment trusts that, collectively, offer a potpourri of real estate—office, retail, industrial, residential—to buy for capital gains and income.
■ Brookfield Property Partners (TSX—BPY.UN) declared a 0.8-per-cent increase to its quarterly distribution in February, bringing it to $0.3325 a unit (all figures in US dollars unless otherwise noted). In May, it maintained that distribution. While we believe management will resist reducing the distribution, prudent investors should not buy the units in anticipation of no reduction.
Hamilton, Bermuda-headquartered Brookfield Property Partners L.P. is one of the world’s premier real estate companies, with about $87 billion in total assets. Its global portfolio mostly consists of office and retail, but includes other real estate sectors as well.
Company funds from operations (CFFO) and realized gains for the three months ended March 31, 2020, were $323 million, or $0.33 a unit, compared with $367 million, or $0.38 a unit, in the same period of 2019. The decrease was led by a 48-per-cent drop in limited partnership (LP) investments to $76 million. Results in the prior period benefited from $60 million of realized gains from the sale of mature assets. Also, CFFO was negatively impacted in the latest quarter by a decrease in earnings from hospitality investments, which saw a significant decline in revenue in March.
Brookfield’s estimated FFO for 2020 will not cover its distribution. But the company is 50-per-cent owned by Brookfield Asset Management, which ensured that its property subsidiary maintained its dividend during the financial crisis of 2008 to 2009.
Brookfield trades at a reasonable 9.4 times its forecast 2020 FFO of C$1.50 a unit. Its annual distribution of C$1.81 a unit yields a high 12.9 per cent, suggesting the market thinks the distribution will likely be cut. Nonetheless, we view Brookfield Property Partners as a buy for growth and income.
■ H&R REIT (TSX—HR.UN) has reduced its monthly distribution 50 per cent to $0.0575 a unit. This decision was partly due to current operating and capital market conditions brought about by the COVID-19 pandemic. The lower distribution provides greater financial flexibility to absorb any income interruption related to the pandemic in the near term. But management says the cut also reflects and is consistent with the change in strategy it undertook in 2017.
Toronto-headquartered H&R REIT is one of Canada’s largest real estate investment trusts with total assets of about $13.4 billion. It 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 three months ended March 31, 2020, H&R’s funds from operations (FFO) were $136.1 million, or $0.45 a unit, compared with $137.0 million, or $0.46 a unit, in the same period of 2019.
Property operating income fell 8.6 per cent to $140.6 million due to asset dispositions, which far outpaced acquisitions.
Same-asset property—or properties open for a year or more—operating income (cash basis) increased 0.9 per cent to $193.0 million. Same-asset property income includes lease termination fees of $0.2 million in the latest period, down from $5.9 million last year. Excluding these fees, same-asset property income rose four per cent, primarily due to growth in property operating income from the residential segment.
H&R is committed to its strategic goals of streamlining and simplifying its portfolio, recycling capital into higher growth assets, and improving its profile as an investment. Since the beginning of 2018, the REIT has executed about $2.0 billion of asset sales, reduced financial leverage and reinvested a portion of the proceeds in residential and industrial properties.
H&R is forecast to report FFO of $1.75 a unit in 2020. The units trade at just 5.7 times that estimate. The new annual distribution of $0.69 a unit yields 6.9 per cent.
Buy for growth and income.
■ RioCan Real Estate Investment Trust (TSX—REI.UN) has seen increased traffic at the grocery stores, pharmacies and other necessity-based retailers at its commercial centres. In the case of its Yonge-Eglinton Centre in Toronto, much of that traffic comes from its condominium building across the street from its mall, as people stay closer to home in the pandemic. From this, it sees validation of its mixed-use strategy.
Toronto-headquartered RioCan is one of Canada’s largest real estate investment trusts. 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. Its portfolio consists of 222 properties with a total leaseable area of about 38.6 million square feet including office, residential rental and 16 development properties.
Funds from operations (FFO) rose 1.7 per cent in the three months ended March 31, 2020, to $144.6 million from $142.2 million a year earlier. FFO per unit, however, declined 2.1 per cent, to $0.46 from $0.47, on more units outstanding. The increase in FFO reflected strong same property net operating income (NOI) growth, NOI from acquisitions and completed developments, higher residential rental NOI, higher other income and lower general and administrative costs.
Ed Sonshine, RioCan’s CEO, has said the REIT’s current distribution is safe. His claim is backed up by RioCan’s ample liquidity.
Thanks to the COVID-19 pandemic, RioCan’s FFO per unit is forecast to decline about 17 per cent this year. Thereafter, FFO should rise in the years after the economy reopens, though it could be some time before it rises to the $1.87 a unit that was earned in 2019.
The units, however, trade at an attractive 9.6 times the $1.55 a unit that RioCan is forecast to earn in FFO this year. Its annual distribution of $1.44 a unit yields 9.7 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 June 12, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846