If you’re constructing an income stream based on REITs, your goal is to find the perfect blend of upfront yield, distribution safety, and potential for distribution growth. Most folks neglect the latter trait, as growth potential only becomes apparent over a longer period of time, but for those who want consistent raises, it’s crucial to analyze the growth potential of a REIT, even though you may think the terms “REIT” and “growth” are oxymorons.
Without further ado, here’s a list of three REITs with reliable, above-average yields and above-average growth prospects.
Inovalis REIT (TSX:INO.UN)
Despite trading on the TSX, Inovalis is a play on the European real estate markets with its portfolio of office-centric properties in urban hot spots in France and Germany, with most of the revenue generated from the former geography.
Inovalis is probably the best REIT you’ve never heard of. The 8.1% yield is a “main attraction” to its shares, and although the distribution may seem unsafe, it’s actually more well covered (87.6% payout ratio), and with enough financial wiggle room and agility to grow its book of properties, the REIT is in a great position to continue chugging along. Although the distribution has remained static over the past few years, I believe management is capable of lifting the bar even higher, as it recently secured funding from a new investor.
NorthWest Health REIT (TSX:NWH.UN)
NorthWest is another one of my favourite REITs, primarily because of its real estate sub-industry. As you’ve probably guessed from the name of the REIT, NorthWest is in the business of renting out health properties like hospitals, clinics, and all the sort.
NorthWest is a high-income play on the Baby Boomers. Their healthcare needs increase with age, and that’s going to cause a boom to the demand for health properties. Seeing as NorthWest is on the ride side of a secular trend, I see ample distribution growth over the long term.
As for the distribution, which currently sits at 7%, it’s quite limiting for the REIT, but it’s safe, as free cash flows have been more than sufficient. As NorthWest continues to spread its wings into new geographies, I expect cash flows to swell and drive down the “tight” payout ratio.
The distribution has been static for nearly a decade, but when the time comes, I believe a big, fat raise will be in store at some point over the next five years.
SmartCentres REIT (TSX:SRU.UN)
SmartCentres isn’t just a provider of real estate to brick-and-mortar retailers. It’s so much more. The trust specializes in retail and mixed-use properties, but its growth focus is heavily tilted on the “mixed-use” side.
The trust is working on its “Smart Urban” business, which is essentially a master-planned community of both office and residential in urban hot spot locations. With such mixed-use properties, the proximity allows residential, office, or retail tenants to have a mutually beneficial relationship with one another, as I described in a prior piece.
As a result, SmartCentres has the potential to unlock further growth down the road, as it leans more on the mixed-use side of its business and away from the strip mall “Smart Centres” that many investors have grown accustomed to. As it chugs along, I see SmartCentre’s retail REIT discount fading with time, and if management plays their cards right, we could see the discount turn into a premium, as well-planned properties will allow the REIT to command higher rents.
As for the distribution, it yields 5.3%, and it’s on an upward trajectory. With a safe 84.1% payout ratio that’s downtrending, I see plenty of room for further distribution growth over the medium term.
Stay hungry. Stay Foolish.
