Gordon Pape: This 7.3% yielding REIT is outperforming peers and is worth considering

Rising interest rates are usually bad news for real estate investment trusts, but that has not been the case so far this year. The S&P/TSX Capped REIT Index has gained 2.6 per cent in 2018. That compares with a year-to-date loss of 12 per cent for the S&P/TSX Composite Index.

This week I am recommending a REIT that has done even better than the REIT index, gaining 7.8 per cent so far this year. Plus, it currently offers a juicy yield of more than 7 per cent. Here are the details:

Dream Industrial REIT (DIR.UN-TSX)

Current price: $9.49

Annual payout: 70 cents

Yield: 7.3 per cent

Risk rating: Moderate

The business: This REIT specializes in light industrial properties, mainly located in Canada but with a U.S. expansion strategy. It owns and operates a portfolio of 223 geographically diversified properties comprising approximately 20.2 million square feet of gross leasable area.

Why we like it: Let’s start with the yield. A return of 7.3 per cent is very attractive these days, especially from a security that has increased its value through all the recent market turbulence. The occupied and committed space at the end of the third quarter was 96.8 per cent, meaning almost all of the assets are generating income.

But there is more to the story. Management is aggressively expanding into the United States, targeting the Midwest and Southeastern United States especially. During the third quarter, the trust added two properties in Columbus, Ohio, to its portfolio.

Financial highlights: Funds from operations (FFO) in the third quarter, the standard measure of a REIT’s financial health, was $22.7-million (20.6 cents per unit). That compared with $18.7-million (23 cents) in the same period last year. The drop in the per-unit results was due to the issuing of new shares to help finance acquisitions. The payout ratio in the third quarter was 85 per cent.

Risks: The main risk investors face now is economic – a recession or a slowdown in the economy could result in lease defaults leading to a reduction in the occupancy rate and a decline in revenue and FFO. The REIT already had a taste of this with its Western Canada assets.

Distribution policy: The monthly distribution is 5.833 cents a unit (about 70 cents a year). The distribution has not been raised since 2013, so don’t expect an increase any time soon.

Tax implications: In 2017, about 70 per cent of the distribution was classified as return of capital for tax purposes. That means no tax was payable on that amount, but the cost base was adjusted to reflect the payment. In a non-registered account, this will result in an increase to any capital gains liability when the units are sold.

Who it’s for: This REIT is well suited for investors looking for above-average income who are willing to accept a moderate degree of risk.

How to buy: The units trade actively on the TSX, with an average volume of more than 270,000 units a day. You should have no trouble getting your order filled. U.S. readers who do not have access to the TSX will have to buy the shares over the counter (ticker DREUF), but be careful. The units are thinly traded (average 1,853 a day) so place a limit order and be patient.

Summing up: This REIT offers a good yield and is expanding into the United States. However, based on history, investors should not expect regular distribution increases.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.