It’s common knowledge that real estate is a stable sector to invest in for income. Instead of getting rental income from only one or a few properties and having to manage or pay someone to manage them, you can get real passive income from a portfolio of real estate properties through real estate investment trusts (REITs).
Northview Apartment REIT (TSX:NVU.UN) and NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) stand out due to their safe, nearly 8% yields.
After the merger with True North Apartment REIT in 2015, Northview has reduced the inherent risk of its portfolio. The transaction helped Northview diversify away from northern and western Canada and reduced the impact of resource-based markets.
Now, Northview has a stronger portfolio with an enterprise value of about $3 billion that’s diversified across more than 24,000 residential suites in over 60 markets across eight provinces and two territories.
Before the merger, Northview’s share-price performance had a high correlation of 90.9% with oil. Since the merger that correlation has been reduced to 47.1%. And the correlation has further decreased in the last three months.
Most importantly, Northview’s distribution yield of almost 7.8% is safe.
First, Northview has paid a growing distribution since 2002. Specifically, it has increased its distribution eight times in that period.
Second, its payout ratio is sustainable. In the first half of the year its payout ratio was 77%. Since the REIT’s occupancy and rental rates are more stable after the merger, its funds from operations (from which cash for distributions is sourced) should also be more stable.
NorthWest Healthcare Properties
NorthWest has primarily focused on consolidating the medical office buildings in Canada between 2009 and 2014. Then, in 2015, it merged with its international counterpart, which diversified the portfolio into major global markets including Brazil, Australia, New Zealand, and Germany.
The portfolio now consists of about $3.5 billion worth of assets across 139 properties with a high portfolio occupancy of 96.2%, an above-average, weighted-average lease expiry of 11 years, and a cap rate of 7.3%.
As well, this portfolio now earns about 46% of its net operating income from hospitals and 54% from medical office buildings and other medical building asset types.
The merger also reduced its payout ratio from about 100% to 87%, which makes its distribution yield of 7.6% much more sustainable than before.
As primarily income investments, unitholders must ignore the stock-price volatility of Northview and NorthWest in order to get a consistent monthly income.
No matter if their stock prices go up or down, their high yields of close to 8% should be sustainable as long as their funds from operations remain stable. And there are no facts indicating otherwise.