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Real estate investment trusts deserve a spot in every income investor’s portfolio. They generate steady cash flow, provide the opportunity for long-term income and capital growth and – if you focus on high-quality REITs – let you sleep soundly.

Today, we’ll look at three REITs that check of all these boxes. As a bonus, even though REITs as a sector have rallied this year, all three are trading at a discount to their net asset value, which makes them even more appealing. (Disclosure: I own all three personally).

Remember to do your own due diligence before investing in any security.

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SmartCentres REIT (SRU.UN)

Price: $30.82

Yield: 5.8 per cent

SmartCentres offers a nice combination of defence and offence: a stable portfolio of more than 150 outdoor malls, most anchored by a Walmart, and a robust development pipeline that includes retail, residential and office properties. “We believe [SmartCentres’] steady/predictable portfolio is well understood but not necessarily the value of the embedded upside from an outsized intensification/development opportunity,” RBC Dominion Securities analyst Michael Smith, who rates the units a “top pick,” said in a recent note. Over the next five years, SmartCentres and its partners plan to develop more than 50 projects valued between $7-billion and $8-billion, with SmartCentres’ share valued at about $3-billion. “In the meantime, investors get well-paid to wait,” Mr. Smith said. In addition to paying an attractive yield, SmartCentres has raised its distribution for five consecutive years, including a 2.9-per-cent hike announced along with second-quarter results in August. Yet the payout ratio is a comfortable 84 per cent of adjusted funds from operations (AFFO). Another plus: SmartCentres has the highest insider ownership in the REIT sector, which aligns management’s interests with those of unit holders. For all of SmartCentre’s strengths, however, the REIT trades at roughly a 7-per-cent discount to the net asset value (NAV) of its real estate, providing an “attractive margin of safety” for investors, Mr. Smith said.

H&R REIT (HR.UN)

Price: $20.11

Yield: 6.9 per cent

H&R has faced its share of challenges, including the loss of Target and Sears stores in Canada, which helps explain the REIT’s sluggish share price and elevated yield. But H&R is working through its issues: Eight of H&R’s nine former Target locations have been fully or partially re-leased, and redevelopment of eight former Sears stores has started – with H&R expecting substantial rent uplifts in both cases when the process is completed. Also this year, H&R completed the sale of most of its U.S. retail assets for about US$633-million, with proceeds used to repay debt and to fund higher-growth initiatives including acquisitions in its U.S.-based Lantower Residential subsidiary. Michael Markidis of Desjardins Securities, who rates the units a buy, said 2018 “should represent trough earnings” for H&R, which is poised to generate midsingle-digit earnings growth in 2019 and 2020 driven by Lantower, completion of the 1,871-suite Jackson Park residential development in Long Island City, N.Y., and the recently acquired River Landing mixed-use project in Miami that will include retail, office and residential properties. Reflecting H&R’s challenges, the units trade at a 17-per-cent discount to NAV, Mr. Markidis said. While the payout ratio is elevated at an estimated 96 per cent of AFFO this year, it should fall to a more manageable 89 per cent by 2020, RBC analyst Neil Downey said in a recent note.

RioCan REIT (REI.UN)

Price: $25.28

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Yield: 5.7 per cent

RioCan, Canada’s largest retail REIT, is in transition as it re-leases former Sears space, works to sell off about $2-billion in non-core assets (a process that is roughly half done) and increasingly focuses on mixed-use developments in major urban markets. One example is The Well, which is located at the corner of Front Street and Spadina Avenue in Toronto and will include about 1.1 million square feet of office space, 500,000 square feet of retail and food services and 1,800 residential units by the time the seven-building project is completed in 2023. While investors wait for The Well and other developments to begin contributing to RioCan’s bottom line, shareholders collect an attractive distribution that is supported by an AFFO payout ratio of 86 per cent and “one of the most disciplined balance sheets in the sector,” according to Raymond James analyst Ken Avalos, who rates RioCan “outperform.” Despite RioCan's brightening outlook, the units still trade at roughly an 8-per-cent discount to NAV.

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