If you’re an income investor, then you may be worried that rising interest rates could hurt the long-term returns of your REITs. To avoid dividend cuts or capital losses, the Foolish investor must buy only the highest-quality REITs with durable competitive advantages and the ability to grow their distributions.
The high-flying days for REITs may be coming to an end, but the party can still live on with these high-quality REITs, which will be able to sustain their distributions through thick and thin.
When looking at REITs to buy, one key area to look at is the distribution history for the past decade. Was the company unable to sustain its distribution during the Great Recession? Was the distribution cut on more than one occasion? If the answer is yes to either of these questions, then you may not want to add that particular REIT to your portfolio because if it has cut its distribution before, it’s very likely to do it again when times become tough.
Has the REIT had frequent raises to its distribution during the past decade? If the answer is yes, then you could be looking at a high-quality pick that has terrific growth and could be poised to outperform its peers, even in an increasing interest rate environment.
RioCan Real Estate Investment Trust (TSX:REI.UN)
RioCan REIT is a huge favourite of mutual fund managers, and it’s no mystery as to why. The REIT is very stable and offers a bountiful 5.5% yield.
The trust owns and develops shopping centres in Canada as well as the U.S. It is Canada’s largest REIT, and it owns 63 million square feet of property.
The management team is terrific and has diversified its tenant base, such that if one fails, then RioCan will not be affected too drastically. RioCan’s top 10 tenants account for less than a third of the company’s bottom line.
The stock is quite cheap right now given the stability that’s offered. The price-to-book multiple is 1.1, which is lower than its five-year historical average multiple of 1.3.
The distribution is very solid and has never been cut in the last decade. No matter how high the yield gets, you can count of RioCan to pay it out to shareholders, even during the worst of recessions.
Canadian REIT (TSX:REF.UN)
Canadian REIT owns over 25 million square feet of leasable area and has over $5.5 billion worth of assets. The company is known as one of the more stable REITs out there, as it owns a high-quality group of industrial, retail, and office properties.
The company didn’t cut its distribution during the financial crisis and has been increasing it steadily over the past decade. Although a 2.7% yield doesn’t seem like much for a REIT, the distribution has been increased every year for the past decade.
When you invest in Canadian REIT, you can sleep comfortably at night knowing that your distribution will be kept safe, even with the headwind of rising interest rates.
The stock trades at a 16 price-to-earnings multiple with a one price-to-book multiple–both of which are much lower than its five-year historical average multiples of 31.2 and 1.6, respectively.
Both these REITs are fantastic picks and will excel even as the tides turn against the industry as a whole. You can count on these two stocks to outperform its peers for many years to come.
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 Joey Frenette has no position in any stocks mentioned.