You can earn income from real estate every month, and it doesn’t have to come from rental properties, so you don’t have to maintain any properties or deal with tenants. Instead, you can invest in real estate investment trusts (REITs), which own and manage a portfolio of properties.
REITs trade like stocks on the stock market. And you can receive a monthly cash distribution from them as a unitholder as the REIT collects rent from tenants.
Here are two REITs that offer sustainable distributions.
Plaza Retail REIT
With a market cap of less than $500 million, Plaza Retail REIT (TSX:PLZ.UN) has been largely under the radar as bigger REITs gain more media attention. However, Plaza Retail REIT has been silently increasing its cash distribution every single year since 2003. So, it’s worthy of investigation.
Plaza Retail REIT owns a portfolio of 300 properties across eight provinces. It had a high committed portfolio occupancy of almost 96% and also passed the $1 billion mark for its assets at the end of the first quarter. Further, its interest coverage ratio was 2.07 times, which meant it had no problem meeting the interest expenses on the debt it owed.
In the first quarter Plaza Retail REIT’s payout ratio was 83.2%, which is reasonable for a REIT. So, it should be able to maintain its monthly cash distribution, which yields almost 5.2% at about $5 per unit. An investment of $1,000 would generate about $52 of income a year.
Plaza Retail REIT has higher growth potential than the typical REIT because it drives growth via value-added developments and redevelopments on top of the organic growth it experiences from its existing portfolio.
In its first-quarter report Plaza Retail REIT had interests in 26 properties, which were under development or redevelopment. Most recently, in June it announced a joint venture with RioCan Real Estate Investment Trust, the largest retail REIT in Canada. RioCan sold a 50% managing interest in three properties to Plaza Retail REIT at an aggregate sale price of $11.5 million. Plaza Retail REIT’s job is to manage and redevelop the assets.
Dream Office REIT
In its May presentation, Dream Office Real Estate Investment Trst (TSX:D.UN) indicated that it owned a portfolio of 160 commercial properties that are diversified across 2,100 tenants in Canada.
Its tenants were diversified across different industries, such as financial and insurance (22%), scientific and technical services (17%), federal or provincial governments (16%), and others (45%).
Dream Office earned 85% of its net operating income from core Canadian markets, including Vancouver, Edmonton, Montreal, Ottawa, and the Greater Toronto Area.
Dream Office trades at a big discount from its net asset value (NAV), so it started executing a strategic plan in February to try to bring its unit price closer to its NAV. The plan involved selling $1.2 billion of its non-core assets within three years, which was about 17% of its portfolio.
Even though the REIT cut its distribution as a part of the plan, the current distribution is now much safer with a payout ratio of roughly 56%, which leaves room for the funds from operations (FFO) to decline as it sells its non-core assets.
The REIT yields 8.1% at about $18.50 per unit. So, an investment of $1,000 would generate about $81 of income a year.
There’s also the potential for capital appreciation as its NAV per unit was $30.31 at the end of the first quarter. So, the REIT is discounted by about 38%.
Summary
Plaza Retail REIT and Dream Office offer safe distributions of 5.2% and 8.1%, respectively, with capital appreciation potential.
At the end of the first quarter Plaza Retail REIT had 11 development or redevelopment projects, which were expected to complete by the end of 2016 and should drive FFO growth.
On the other hand, Dream Office trades at a double-digit discount from its NAV, and the strategic plan that it initiated in February has already brought its units 15% higher.
