It used to be very difficult for the general public to invest in commercial real estate. Only the wealthy and those with connections could invest in it. Now it’s easy to invest in commercial real estate with real estate investment trusts (REITs) such as Dream Global REIT (TSX:DRG.UN) and NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN).
Dream Global REIT
Dream Global is your ticket to investing in commercial real estate properties across Germany. Since its initial public offering in 2011, the REIT has made over $1.9 billion of acquisitions (across 32 properties) and achieved $2.6 billion of assets at the end of November. Its portfolio now consists of roughly 13.4 million square feet of gross leasable area.
On average, Dream Global’s acquisitions have been completed at roughly a 4% spread between cap rate and cost of financing, equating to 10-12% levered returns on equity.
The REIT focuses on the office markets in the cities of Hamburg, Berlin, Munich, Stuttgart, Frankfurt, Cologne, and Dusseldorf. These cities have had a generally positive trend of rent increases and low vacancy rates since 2005.
At $8 per unit, Dream Global yields 10%. With most returns expected to come from its yield, it’s essential to determine the safety of its distribution. A point of concern is that Dream Global earns 24.7% of its gross rental income (GRI) from its top tenant, Deutsche Post. The management has been addressing this tenant concentration risk since 2011. Back then Deutsche Post contributed to 85% of GRI!
Another risk factor is Dream Global’s high payout ratio. Its payout ratio is 95%, which gives it little room for error.
NorthWest Health Prop Real Est Inv Trust
NorthWest offers investors access to a portfolio of international healthcare real estate located in Canada, Brazil, Germany, and Australasia. Specifically, NorthWest earns 55% of its net operating income (NOI) from Canada, 23% from Brazil, 12% from Germany, and 10% from Australasia.
In November the REIT had a portfolio of 123 properties with total assets of $2.5 billion. Medical office buildings contributed 67% of its NOI and hospitals contributed the remainder.
NorthWest’s top 10 tenants contribute 29.5% of gross rent. The REIT’s occupancy rate is 95.8%, and its payout ratio is just under 96%. Although there’s no immediate danger to its yield, its high payout ratio leaves little room for error.
Through November to May, NorthWest Healthcare targets a net asset value of about $10 per unit and adjusted funds from operations (AFFO) per unit of $0.90-0.95. If the higher AFFO per unit is achieved, its payout ratio would be reduced to 84-89% and make its distribution safer.
At $8.60 per unit, NorthWest Healthcare yields 9.3%.
Tax on distribution income
REITs pay out distributions that are unlike dividends. If you wish to avoid the different tax-reporting hassle, buy REITs in TFSAs or RRSPs. However, investors may be interested to know the return of capital portion of the distribution is tax deferred until unitholders sell or the adjusted cost basis turns negative.
Conclusion
Dream Global and NorthWest both yield 9-10%. However, their high payout ratios of 95% and above leave little room for error. If their FFO per unit are reduced, they might have to cut their distributions. That said, I don’t see an immediate danger to their yields right now.
