In this low-interest-rate environment, many investors continue to focus on finding investments that offer attractive yields. Real estate investment trusts can be a source of attractive yields combined with potential capital gains.
Listed in the table below are a select number of REITs well covered by analysts with their respective rankings. Discussed below is a REIT that may offer solid double-digit returns for investors.
Trading on the TSX Venture Exchange, Pure Multi-Family REIT LP may be a small-cap investment, but there is nothing small about its potential returns.
Pure Multi owns and manages 15 multifamily real estate properties, with 14 properties located in Texas and one in Arizona. Management is focused on shifting to high-quality assets by acquiring Class A apartment properties, which are relatively new and have minimal capital-spending requirements, while divesting its older, or Class B, assets.
Management's overall strategy is a combination of growth while providing unitholders with steady distributions. In the midterm, management plans to expand into new markets while remaining in the southeast and southwest U.S. regions, where management sees improving labour market conditions and high occupancy rates. Over the long-term, management is eyeing expansion into all growth regions in the United States. Pure Multi recently raised money in the markets with an equity offering that was in strong demand and more than two times oversubscribed. The REIT is well financed to fund its near-term growth objectives.
Operationally, Pure Multi has delivered solid financial results. At the end of the second quarter, it reported funds from operations of 11 cents (U.S.) per unit, in-line with expectations. Same-property revenue growth was over 5.8 per cent year-over-year. Same-property net rental income increased 9.8 per cent year-over-year. Same-property average rent per occupied unit rose 5.7 per cent year-over-year. Leased occupancy was 99.3 per cent. Units are listed on the TSX Venture Exchange and can be purchased in either U.S. dollars or Canadian dollars. Units trade in U.S. dollars under the ticker RUF.U and in Canadian dollars under the ticker RUF.UN.
Attractive yield
This REIT pays unit holders a monthly distribution of 3.125 cents a unit, equating to an annualized distribution of 37.5 cents a unit and a yield of over 7 per cent. The REIT has maintained this monthly distribution since 2013 and it appears sustainable. The debt-to-gross-book-value ratio was 53.9 per cent at the end of the second quarter, below management's targeted range of between 55 per cent and 65 per cent. The adjusted funds from operations (AFFO) payout ratio was 92.6 per cent.
Valuation
The REIT is trading at under 11 times the 2016 consensus AFFO estimate. This is at a discount to its peers such as Boardwalk REIT, InterRent REIT, Milestone Apartments REIT and Canadian Apartment Properties REIT.
Analysts' recommendations
All seven analysts that cover this REIT have buy recommendations. One-year price targets by analysts range from $5.61 to $6.50, with the average one-year price target of $5.98. When combined with the yield, the potential total return is over 20 per cent. The consensus AFFO is 43 cents a unit in 2015 and 49 cents per unit in 2016.
Chart watch
Year-to-date, this small-cap REIT has delivered solid returns to unit holders, outperforming both the S&P/TSX composite index and the S&P/TSX capped REIT index.
The Canadian dollar units, RUF.UN, have downside support near $6.70 (Canadian), and failing that in the $6.40 to $6.50 range, which is near its 50-day moving average of $6.44. Technically, the stock is near overbought levels.
The U.S. dollar units, RUF.U, have technical support between $5 (U.S.) and $5.06.
The bottom line
Pure Multi-Family REIT represents an attractive investment for investors seeking income combined with potential price appreciation. This REIT has exposure to the strengthening U.S. market, continues to build a portfolio of high-quality multifamily properties, offers unit holders a steady distribution, and has potential future organic and acquisition growth. Accumulate units on price weakness.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com