Before publicly traded real estate investment trusts (REITs) were available, it was nearly impossible for the general public to invest in commercial real estate and get juicy rents.
Now anyone can invest passively through REITs and get commercial rental income.
Here are two REITs that offer 8-10% yields.
Artis Real Estate Investment Trust (TSX.AX.UN) is a diversified REIT that owns commercial properties. Its net operating income (NOI) is diversified across office properties (50.3%), retail properties (25.6%), and industrial properties (24.1%).
At the end of September 30, Artis REIT had 26.2 million square feet of gross leasable area across 255 properties, and it maintained a 95% portfolio occupancy rate. Artis is primarily invested in Canada, but it also has some assets in select markets in the United States.
Why the 18% dip in price?
It has come down close to 18% from its 52-week high to about $13 per unit perhaps because it has 35% of NOI coming from Alberta. However, investors should be aware that 28% of its NOI comes from the United States.
Is its 8.3% yield safe?
Artis REIT’s 2015 adjusted funds from operations (AFFO) per unit is $1.30, and 2016 AFFO per unit is $1.33. That would make its 2015 AFFO payout ratio 83% and its 2016 payout ratio 81%. So, its distribution yield of 8.3% is safe.
Unitholders can opt to reinvest Artis REIT distributions at a 4% discount.
Valuation and growth
With a net asset value (NAV) of $16.3 per unit, Artis REIT is discounted by about 20% at about $13 per unit. Additionally, in the last five quarters Artis experienced NOI growth of 2.4-5.5% every quarter. The highest NOI growth occurred in the last quarter that ended on September 30.
NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) owns a portfolio of international healthcare real estate throughout major markets in Canada, Brazil, Germany, Australia, and New Zealand. Specifically, NorthWest Healthcare Properties REIT receives rent from hospitals and medical office buildings (MOBs).
Its top tenant is Rede D’Or SL, a hospital in Brazil that contributes 13.3% of gross rent. Its other top tenants include Shoppers Drug Mart, Lawtons Drugs, Alberta Health Services, and the provincial government of Ontario. Together its top 10 tenants contribute 29.5% of gross rent.
Its NOI is diversified across 123 properties. MOBs contribute 67% of NOI, and hospitals contribute 33%. Geographically, 55% of NOI comes from Canada, 23% comes from Brazil, 12% comes from Germany, and 10% comes from Australasia.
Is its 9.5% yield safe?
NorthWest Healthcare Properties REIT maintains a high occupancy rate of 95.8%. Further, its weighted average lease is 9.9 years. However, its AFFO payout ratio is also pretty high at 95.7%.
At $8.4 per unit, it yields 9.5%. Its distribution is covered, but its high payout ratio leaves little room for error. Investors who decide to buy this REIT should monitor its occupancy rate.
Unitholders can opt to reinvest NorthWest Healthcare Properties REIT distributions at a 3% discount.
Valuation and near-term targets
NorthWest Healthcare Properties REIT’s NAV is roughly $9.49 per unit. So, at $8.4 per unit, it’s discounted by about 11%.
For the next 12-18 months, the REIT targets AFFO per unit of 90 cents to 95 cents, NAV of about $10 per unit, and an occupancy rate of about 96%.
If the AFFO target range is achieved, it’ll bring down the REIT’s payout ratio to safer levels of 84.6-89.3%.
Tax on income
REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
The return of capital portion reduces your adjusted cost basis. This means that that portion is tax deferred until you sell your units or until your adjusted cost basis turns negative. So, if you buy REIT units in a non-registered account, you’ll need to track the change in the adjusted cost basis. The T3 that you’ll receive will help you figure out the new adjusted cost basis.
Of course, each investor will need to look at their own situation. For instance, if you have room in your TFSA, it doesn’t make sense to have investments in a non-registered account to be exposed to taxation.
REITs are great income vehicles. However, if interest rates rise, they might dip a bit.