Everyone must find a place to live in. If you don’t own a place, you must rent one. That’s why residential real estate investment trusts (REITs) are a stable asset class.
Here are two residential REITs that have higher growth potential than the industry.
Interrent Real Estate Investment Trust (TSX:IIP.UN) is focused on generating value and growing a sustainable distribution with a portfolio in Ontario and Quebec.
Interrent REIT’s primary markets contribute about 80% of its net operating income (NOI). The company also has a capital-recycling strategy, which looks to refinance at favourable rates and to sell non-core assets.
At the end of September, Interrent REIT had 8,059 suites and a portfolio occupancy of 94.2%.
The current management has been with the company since 2009. Since then, it has rebuilt and repositioned the company. It took a little over a year for the management to start turning the company around with amazing results.
Interrent REIT was trading at $1.80 per unit when the management took over. The units are more than 300% higher now. Additionally, the units paid an initial yield of nearly 6.7%, which has grown to a yield on cost of 12.9%!
Although Interrent REIT only yields a little more than 3.3% at $7.24 per unit, since 2011, it has hiked its distribution by 94% from an annual payout of 12 cents to 23.3 cents per unit. That is very strong growth of nearly 14.2% per year!
That said, in the last two years, it has increased its distribution by about 5% each year. So, recent growth has slowed down but is still higher than most REITs. After all, it’s not a common practice for Canadian REITs to hike their distributions.
Interrent REIT’s payout ratio is about 63%, and it’s at the low end compared to six other peers. So, the REIT has room to grow its distribution.
Killam Apartment REIT (TSX:KMP.UN) has $1.9 billion of assets, including 13,952 apartment units and 5,165 manufactured home community (MHC) sites.
It earns 89% of its NOI from apartments, 9% from MHCs, and 2% from commercial properties. Geographically, it earns 83% of its NOI from three provinces: 43% from Nova Scotia, 22% from Alberta, and 18% from Ontario.
Killam’s growth strategy includes increasing earnings from its current portfolio, making accretive acquisitions, and developing high-quality properties in its core markets.
At about $12, Killam yields nearly 5% with a sustainable payout ratio of about 71%.
Summary
Interrent REIT and Killam offer safe yields of about 3.3% and 5% in the stable multi-family REIT asset class. Both companies are fairly valued to fully valued. So, they would be especially great buys for income on any further dips.
