Real estate investment trusts deserve a place in every well-balanced portfolio.
REITs offer above-average yields, provide the potential for capital growth and – unlike a direct investment in a rental property – they don’t require you to get your hands dirty. All you do is put up your capital and the REIT’s management takes care of the rest – collecting rent, leasing vacant space, doing repairs and acquiring new properties.
Now is a good time to shop for REITs because, with the recent rise in interest rates, many REIT unit prices are well off their highs. That means their yields, which move in the opposite direction to the unit price, have risen. So you get more cash flow for every dollar you invest.
Today, we’ll look at three well-established REITs that yield more than 6 per cent. Because of their generous yields, these REITs should be viewed primarily as income vehicles – with the potential for modest capital and distribution growth. Remember to do your own due diligence before investing in any security.
H&R is one of Canada’s largest REITs, with more than $13-billion of assets that include office, retail, industrial and multifamily residential properties. Aiming to generate more value for unitholders, the REIT has been streamlining its portfolio by selling nearly $1-billion of non-core properties this year – including substantially all of its U.S. retail assets – and redeploying the proceeds into debt reduction and higher-growth opportunities such as its U.S.-based Lantower Residential division.
H&R has had its share of bad luck – its Primaris division has struggled with the loss of Target and, more recently, Sears Canada – but H&R’s fortunes got a boost recently when Amazon chose Long Island City as the site of one of two new headquarters. The neighbourhood, in the New York borough of Queens directly across the East River from Midtown Manhattan, is also the site of H&R’s 50-per-cent-owned Jackson Park development – a 1,871-suite luxury rental complex that is nearing completion and more than half occupied.
“A massive influx of future employment growth would be positive for the project, albeit perhaps not material to H&R in aggregate,” RBC Dominion Securities analyst Neil Downey said in a note. H&R is in transition, which helps to explain why its unit price has been treading water and its distribution has risen only once in the past five years. But patient investors can collect a juicy distribution while they wait for H&R’s turnaround efforts to bear fruit.
It’s been an exceptionally busy year for Choice Properties REIT. In February, Choice – the real estate arm of Loblaw Cos. Ltd. – acquired Canadian Real Estate Investment Trust (CREIT), creating Canada’s largest REIT and enhancing Choice’s future development and intensification opportunities. Then in September, the grocer announced the spin out of its 61.6-per-cent interest in Choice to Loblaw parent George Weston Ltd., turning Loblaw into a pure-play retailer while positioning George Weston as Choice’s major shareholder. Choice currently has a $1.2-billion development program, about one-third of which is residential, that will drive long-term growth in cash flow, over and above the stable and predictable returns from its extensive retail portfolio.
“Overall, we think Choice is set up for growth at a steady pace, and any milestones achieved on major developments could result in significant value creation,” CIBC World Markets analyst Sumayya Hussain said in a recent note. In addition to intensification opportunities at its existing retail centres, Choice has about 60 sites – many close to public transportation – that could potentially be developed as residential-focused, mixed-use communities. Unlocking that value will take years, but patient investors will almost certainly reap the rewards.
Plaza Retail REIT’s units have struggled for the past couple of years, probably because in the age of e-commerce investors are wary of retail-focused REITs. But even in the face of Amazon, Plaza has demonstrated that malls can succeed if they have the right mix of tenants. Focused on Eastern Canada, Plaza specializes in turning around troubled shopping centres and strip plazas by redeveloping the sites and bringing in national tenants such as Sobeys, Shoppers Drug Mart, Dollarama and Tim Hortons – the sorts of stores that are largely insulated from the e-commerce threat. Plaza has raised its distribution for 15 consecutive years but, in light of its weak unit price, did not announce an increase for 2019 along with its third-quarter results, breaking with tradition.
“Our board is of the opinion that we are not receiving credit for or being properly recognized for these distribution increases,” chief executive Michael Zakuta said on the Nov. 15 conference call. Instead, Plaza plans to use its cash to buy back units, which are trading at “way too great” a discount to the REIT’s true worth given the value of its existing portfolio and growth pipeline, he said. Plaza’s string of annual distribution increases isn’t necessarily over: It could still announce a hike later in 2019 to keep the streak alive. With or without an increase, the yield is attractive.
Disclosure: The author personally owns units of HR.UN, CHP.UN and PLZ.UN and holds CHP.UN in his model Yield Hog Dividend Growth Portfolio. View it here.