6.8 Percent Dividend Yield! I’m Buying This Stock and Holding for Decades

Investors could buy H&R REIT (TSX:HR.UN) units at nearly 60% discount to fair value, receive monthly distributions yielding 6.8% annually, and double capital over the next decade

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Have you ever stumbled upon an undervalued TSX monthly dividend stock with a massive price discount, a safe and growing payout, and a clear path to explosive future growth? That’s exactly what I found with H&R Real Estate Investment Trust (TSX: HR.UN). Here’s why I’m betting big on H&R REIT units as a 6.8% yielding passive income and growth investment to buy and hold for the long haul.

H&R REIT: A treasure trove of discounted prime real estate

H&R REIT boasts a diversified portfolio valued at a whopping $9.3 billion. The trust owns a mix of residential, office, industrial, and retail properties across Canada and the United States, totalling over 26.9 million square feet of gross leasable area (GLA). The real estate investment trust’s (REIT’s) properties’ net asset value (NAV) sat at $21.05 per unit (as of March 31, 2024), while the trust units traded at a mere $8.77 at the time of writing. That’s a staggering discount of 58.3%! Imagine buying a dollar’s worth of real estate for just 42 cents!

Why are H&R REIT units trading at a massive discount despite solid fundamentals? Once ravaged by COVID-19 era rent collection challenges, H&R REIT is recycling capital by selling retail and office properties and reinvesting proceeds into best-in-class multi-residential and industrial real estate. The process involves a fair amount of risk, and some market participants are scared.

However, not only has the trust been executing its portfolio makeover successfully since 2021, but its units’ fair value could keep growing as interest rates fall. The trust’s NAV increased by 145 basis points in just the first quarter of 2024.

Investors who hold trust units long enough until management completes the portfolio recycling process may gain as the deep discount evaporates.

Solid fundamentals and a winning strategy

H&R REIT boasts impressive operational results. The trust has delivered a remarkable nine consecutive quarters of positive same-property net operating income (SPNOI) growth. Its portfolio occupancy rate is a stellar 96.4%, with tenants locked into leases averaging 6.8 years. This high occupancy combined with a low debt-to-assets ratio of just 44.5% paints a picture of a financially secure, well-managed REIT capable of financing its long-term strategy.

Moreover, the REIT’s transformational strategy is already showing progress. Residential properties now comprise 44% of its portfolio, compared to just 25% in early 2021. Industrial holdings have nearly doubled, while office and retail space have shrunk significantly.

Double your capital (and keep getting paid)

This shift towards residential and industrial real estate positions H&R REIT perfectly to capitalize on long-term trends. Urban migration and economic growth in key areas like the Greater Toronto Area (GTA) and the U.S. Sunbelt suggest strong demand for these property types for decades.

The potential long-term returns on an H&R REIT investment are simply too good to ignore. The current 6.8% distribution yield could effectively double your capital in just over 10 years, based on the Rule of 72. Those distributions seem very secure, with a low payout ratio of adjusted funds from operations (AFFO) of just 61% seen during the first quarter. Plus, if the discount to NAV narrows, you could see additional capital gains of up to 140% on top of the steady stream of dividends.

A bet on the future of North American real estate

Of course, no investment is without risks. Redevelopment and property sales take time, and construction cost inflation could impact budgets. Additionally, a shift away from North American reindustrialization policies could hinder demand for industrial space.

However, I believe the long-term trends favour H&R REIT. As long as major North American cities remain attractive places to live and work, and the demand for industrial space stays strong as supply chains diversify from over-reliance on Chinese and East Asian production hubs, H&R REIT is well-positioned to thrive.

Investor takeaway

H&R REIT offers a rare investing opportunity: a deep discount on high-quality real estate assets, a safe and growing 6.8% distribution yield, and a clear path to future value creation. For dividend investors looking for a long-term investment with the potential for substantial returns, H&R REIT deserves a serious look. It’s a rewarding passive income and growth play on the future of North American real estate — and the future looks bright for the trust.

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 Brian Paradza has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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