Most investors have considered real estate investing at some point. Real estate is one of the most dependable asset classes out there – who wouldn’t want steady capital appreciation along with reliable rental income? Indeed, it’s possible for a real estate investor to achieve both. But being a landlord has many downsides, including:
- Non-paying tenants
- Repairs
- Rent control
- And more
It can be a real headache. Fortunately, there is an asset class that spares you all that headache:
Real estate investment trusts (REITs). REITs are pooled investment vehicles similar to exchange-traded funds (ETFs) that invest in portfolios of properties. In reality, REITs are companies, but legally they’re structured more like funds, and ownership stakes in them are called “units” rather than “shares.” Nevertheless, they offer a lot of income potential, and can even deliver capital growth sometimes. In this article, I will review two Canadian REITs that could deliver passive income and capital growth.
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Riocan REIT
Riocan Real Estate Investment Trust (TSX: REI.UN) is a Canadian mixed-use real estate REIT that invests in “trophy properties” across Canada. Its portfolio includes several recognizable big city landmarks, such as The Well in Toronto and Coliseum in Ottawa.
How is RioCan doing these days?
It’s a mixed picture. The company’s revenue has only grown modestly and its earnings are actually down over an entire five-year period. However, its most recent quarter was pretty good, boasting the following metrics:
- $274 million in rental revenue, up 0.9% year over year
- $159 million in same-property net operating income (NOI), up 3.4% year over year
- $0.44 in funds from operations (FFO), up 4.8%
- $118 million in net income, down 26.3%
- A 59.3% payout ratio
Overall, these results aren’t bad, and are much better than what the decline in earnings would have you believe. Investors usually evaluate REITs by metrics like NOI and FFO rather than GAAP earnings, and by those standards, REI.UN has performed satisfactorily.
Northwest Healthcare
The Northwest Healthcare Properties REIT (TSX:NWH.UN) is a Canadian healthcare REIT that specializes in leasing office space to healthcare providers. This includes health clinics, healthcare administrative offices, and more. This is a relatively stable niche within the world of real estate. In Canada and the the EU, healthcare is largely government-funded, giving healthcare providers high revenue stability. This in turn gives NWH.UN high revenue stability.
How is NWH.UN doing with this major built-in advantage?
Pretty well. Over the last five years, it has grown its revenue, EBITDA, and book value at the following compounded annual rates:
- Revenue: 6.5%
- EBITDA: 5.4%
- Book value: 22%
Not a bad showing overall. And with NWH.UN now investing in new properties in the U.S., it may grow even further.
Foolish takeaway
REITs. They aren’t the most well-known investments on the stock market, but they can be very rewarding for investors. Typically offering high income, and sometimes capital gains, they are an income investor’s best friend. While a REIT investment probably won’t make you rich overnight, it could establish regular and dependable cash flow. Investments of this type often end up working out a lot better than ‘putting it all on red,’ whether the ‘red’ thing in question is a casino chip or a microcap stock.
