Since the end of the financial crisis, the iShares S&P/TSX Capped REIT Index (TSX: XRE) has rallied 75% over the past five years. The yield of the exchange-traded fund now barely breaks 4.9%, far lower than the 7% the fund has averaged over the past decade.
However, despite these headwinds the sector still offers opportunities for investors who can sift through the chaff. The trick is to identify companies with organic growth prospects, conservative balance sheets, and distribution growth potential. With that said, here are three names that offer just that.
Western Canada’s commodity boom isn’t just creating fortunes for energy companies. It has also set off one of the largest human migrations in Canadian history. That’s creating opportunities for all kinds of businesses.
As Alberta’s top residential landlord, Boardwalk REIT (TSX: BEI.UN) is the best positioned to exploit this trend. A bulging population bodes well for apartment rents and occupancy rates. Families are also being forced to delay buying new homes thanks to tighter lending rules and higher mortgage rates.
Don’t skip this trust because of its measly 3.2% yield. The firm has a great history of rewarding investors, boosting its payout 70% over the past decade.
Crombie REIT (TSX: CRR.UN) is one of the most defensive names in the REIT sector. Approximately 80% of the trust’s anchor tenants are grocery or drug stores. These are strong, credit-worthy tenants — like Sobey’s, Shoppers Drug Mart, Canadian Imperial Bank of Commerce, and Dollarama — that aren’t going out of business any time soon.
However, this retail landlord is also positioned for growth. Following its acquisition of Safeway’s real estate portfolio last year, the trust has established a foothold in the hot market of western Canada. That should provide a big boost to the trust’s growth profile.
Chartwell Retirement Residences
Chartwell Retirement Residences (TSX: CSH.UN), which owns retirement and long-term care facilities in North America, will benefit from the rise in demand from aging baby boomers. Demand growth should start to overtake supply over the next few years. That should provide a boost to occupancy rates and allow the fund to raise rents.
However, Chartwell is also a turnaround play. The fund has abandoned its mezzanine lending business to develop new retirement homes and has sold off core assets. Following the financial crisis, the trust lowered its payout ratio to a more manageable 80% of adjusted funds from operations. The effort has provided a material boost to financial results.
The bottom line is that without steadily falling interest rates, REITs won’t be a source of double-digit returns like in the past. However, trusts that can deliver organic growth should still be a source of outsized profits.
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Fool contributor Robert Baillieul owns shares of the iShares S&P/TSX Capped REIT Index Fund.