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Get High Quality Real Estate Income From Canadian REIT

I want my retirement portfolio to generate enough income and growth to sustain my lifestyle. Each portfolio holding must be high quality, and the company should have a culture of increasing income at an inflation-beating pace. I believe Canadian REIT (TSX:REF.UN) is such a company.

About Canadian REIT
Canadian REIT or CREIT was the first publicly listed real estate investment trust in Canada. Since being listed on the TSX in September 1993, it has accumulated high-quality real estate assets, aiming to receive 50% of rental income from retail properties, 25% from industrial properties, and 25% from office properties. When acquiring properties, Canadian REIT aims for quality because it helps maintain high occupancy levels and high rental rates.

Canadian REIT’s retail portfolio provides stable and reliable income with a high occupancy rate that has never gone below 95% since 1994.

CREIT’s industrial portfolio consists of shorter lease terms, allowing for rental adjustments with income growth potential. CREIT looks for industrial properties that can fill the need of a broad range of users. As a result, since 1994, the industrial portfolio occupancy rate has remained above 90%.

Canadian REIT’s office portfolio occupancy levels and rental rates is the most volatile of the three property types. To reduce risk, the management team developed a strategic initiative to sell a 50% interest in each of its major office properties to a non-managing partner. Further, it receives additional income for managing and leasing the co-owner’s interest in the properties.

Canadian REIT has a core competency in managing and leasing its properties. This leads to a high occupancy rate and high rents.

Track record
Each board of trustee member is required to invest a minimum of $250,000 in the REIT while the president, and chief executive officer have larger ownership requirements. Further, over 90% of CREIT employees are CREIT unit holders. This alignment of interest helps in the success of the REIT.

CREIT has a track record of growing its asset value, funds from operations, and distributions, which collectively have led to outperformance of the stock. The REIT’s 20-year annual return is 15.6%, while the average market returns have been roughly 7% to 10% during that period.

Between 1993 and 2013, Canadian REIT’s assets grew from $84 million to $3.9 billion, an annual growth of 21%. And from 1994 to 2013, its funds from operations grew from $0.63 per unit to $2.84 per unit, an annual growth of 8.25%.

This success has been shared with unit holders, in the form of increasing distributions from $1.17 per unit in 2001 to $1.75 per unit in 2014. All increases were supported by the business performance. Specifically, its one-year distribution growth rate is 8.4%, and its three-year rate is 6.8%. That is, it’s trending towards a higher distribution growth in recent years, since its 10-year rate is 3.4%.

Further, CREIT has reduced its payout ratio from 94% in 2001 to 59% today. This prudent payout ratio indicates a reliable income stream that’s most likely to continue to grow, as well as the ability to make strategic acquisitions when opportunities arise.

Is it the right time to buy Canadian REIT?
I believe Canadian REIT is fairly priced between $44 and $47. Its yield of 3.7% to 4% is at the high end of its four-year range. Tax treatment of REITs is different from the typical Canadian stock. To avoid any tax hassle, buy Canadian REIT in a TFSA or RRSP.

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Fool contributor Kay Ng owns units in Canadian REIT.

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