There’s another way for investors to capitalize on real estate other than buying physical properties: real estate investment trusts (REITs).
REITs generate monthly income just like real properties do. Moreover, REIT properties are managed by professional teams, so you can spend your time doing things you like.
Additionally, a REIT typically owns a portfolio of assets, which is more diversified than if investors bought physical properties one by one. Investors can simply invest in REITs on the stock market just like investing in stocks.
Here are two office REITs that yield up to 9.5%.
Dream Office Real Estate Investment Trst’s (TSX: D.UN) portfolio is comprised of 22.3 million square feet of gross leasable area across office properties in central business districts and suburban areas in Canada.
It trades at a significant discount from its net asset value. At about $19 per unit, it’s discounted by about 36%. It offers a high yield of 7.8% with a funds from operations (FFO) payout ratio of 56%.
Furthermore, Dream Office has been going through some major changes year to date. First, it cut its distribution by 33%. Second, it eliminated its distribution reinvestment plan (DRIP). Third, it’s in the process of selling $1.2 billion of non-core assets over a period of three years. Lastly, in June it renewed the normal course issuer bid to buy back up to 10% of its float.
Dream Office made the right move by cutting its distribution and maintaining a more conservative payout ratio. The cancellation of the DRIP is also beneficial because it reduces dilution of unitholder value.
So far, Dream Office has sold $212 million of its non-core assets. As it sheds its non-core assets, its FFO will decline and its payout ratio will head higher. However, the sale proceeds will be used to strengthen its balance sheet and reduce debt.
Ultimately, Dream Office’s 7.8% yield is safe with a big margin of safety, and it should become a stronger REIT.
Slate Office REIT (TSX:SOT.UN) is an alternative office REIT to consider for a high income. It focuses on non-trophy office assets, which make up two-thirds of the Canadian office inventory and are overlooked by large commercial real estate companies.
These non-trophy downtown and suburban properties can be purchased at significant discounts to replacement costs. Further, they typically have higher cap rates than trophy assets and have upward pressure on rents.
For example, in May 2015 Slate Office bought Fortis Inc.’s (TSX: FTS) portfolio of 14 properties in Atlantic Canada at a 65% discount to replacement costs. In fact, by the end of June 2015 Fortis had bought 15.5% of Slate Office’s outstanding units for $35 million at $7.40 per unit. One big reason for this was probably for Slate Office’s above-average monthly income.
This portfolio has a cap rate of 8.2% and about $10-12 upward pressure on rents. The only negative it had was an occupancy rate of 89%, which was lower than the market occupancy rate of 94%.
At about $7.90 per unit, Slate Office yields 9.5%. It had a sustainable payout ratio of 90.3% in the first quarter.
Conclusion
Both Dream Office and Slate Office offer an income boost to any portfolio. Their sustainable above-average yields can help smooth out investors’ returns in the volatile markets.
On top of that, Dream Office trades at a significant discount from its net asset value, so it has the potential to head higher. On the other hand, Slate Office operates in a favourable space as the assets it targets are typically purchased at a discount to replacement costs and have above-average cap rates.
