Need Income Now? Utilities Aren’t the Only Way to Go

Forget about pricey utilities. Consider fairly valued H&R Real Estate Investment Trust (TSX:HR.UN) for income today.

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Utilities are known for their high yields, and the same goes for real estate investment trusts (REITs). In fact, H&R Real Estate Investment Trust (TSX:HR.UN) pays a monthly cash distribution and offers an above-average yield of 5.75% at about $23.50 per unit. A $10,000 investment would generate an annualized income of $575.

The business

H&R REIT is the largest Canadian diversified REIT. It owns a portfolio of office, retail, industrial, and residential properties. Specifically, it has about 37 office assets, 158 retail assets, 103 industrial assets, and nine residential assets across more than 46 million square feet. Furthermore, H&R REIT has a 33.6% interest in ECHO Realty LP, which owns 208 properties across 8.7 million square feet.

In the second quarter, by asset type, H&R REIT earned 51% of its operating income from its office assets, 39% from its retail assets, 9% from its industrial assets, and 1% from its residential assets.

Geographically, it earned 33% of its operating income from Ontario, 29% from the United States, 27% from Alberta, and 11% from other Canadian provinces.

Stable cash flows

Since 1997 H&R REIT has maintained a high portfolio occupancy of 95% or higher. The REIT has average commercial lease terms of about 9.5 years, which is one of the longest in the industry. Additionally, H&R REIT earns about 62% of stable operating income from Ontario and the U.S.

H&R REIT’s consistently high occupancy, long average lease terms, and its portfolio in Ontario and the U.S. should improve the stability of its cash flows, which translates to a safer distribution.

Although H&R REIT has meaningful exposure to Alberta, its office tenants there are some of the strongest energy companies in Canada. Their average remaining lease term of about 17.1 years should also help stabilize H&R’s cash flows.

H&R REIT rents to Encana in two locations. It is H&R REIT’s top tenant, contributing 12.1% of the REIT’s rental income with an average lease term of 21 years.

Future growth

H&R REIT purchased a 50% interest to develop a landmark residential rental development in Long Island City, New York. It is zoned for 1.3 million square feet of mixed-use development, accommodating up to roughly 1,871 rental units and about 15,000 square feet of retail space. Construction started in the first quarter of 2015, and occupancy is expected to begin in late 2017.

H&R REIT also has three pieces of land in Ontario held for development. Occupancy is expected to be in the second quarter of 2017 for two of them.

Conclusion

Having a payout ratio of less than 70%, a strong balance sheet with a 46% debt-to-asset ratio, and earning stable cash flows, H&R REIT has the ability to maintain its yield of nearly 5.8% for income investors. At the same time, H&R REIT is priced close to its book value with growth potential from its development projects.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned.

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