5 Real Estate Investment Trusts (REITs) we’d like to own

By | April 9, 2016

5 real estate investment stocks we'd love to own - dividends down under blog

Author: Mr DDU.

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What is a Real Estate Investment Trust (REIT)?

In uncertain times people often like to turn to safer assets where value, earnings and dividends/distributions are safer and more reliable than cyclical ones.

Real Estate Investment Trusts often fit nicely into this ‘reliable’ category because they have set up a rental contract with the tenant, which makes the rent (their revenue) fixed. REITs will often have rental increases already agreed with their tenants in the contract as well, which guarantees revenue increases (great for the investor) and the tenant knows exactly how much they will be paying in the future.

There are several different REIT ‘sectors’, with the main 4 being:

Industrial: such as factories, warehouses or industrial parks
Office: medium to large office buildings in cities
Hotel and leisure: such as hotels, cinemas and theme parks
Retail: such as shopping centres and malls

But if the trust can find a tenant, it can be any type of real estate. But it’s important to note the REIT doesn’t necessarily run the business, just rents the building to another business.

Also, I should note that REITs don’t generally have franking credits (but in specific cases they can have them).

If you are reading this quite a bit later than when it was posted, information in this article might not be current.

5 REITs we’d pick

So bearing all that in mind, here are 5 that we think have got good long term futures that we want to buy:

Rural farm funds (ASX:RFF)

Market size: $254m
Dividend yield: 5.70%

Rural farm funds (ASX:RFF) is unique on the Australian Stock Exchange in that it is the only REIT to invest purely in farming/food real estate. Food is something that should increase in value over time, the population is increasing, inflation is happening and we all eat food right? So the premise of a farmland REIT is a sound one. The benefit of being the landlord means that Rural Funds’ revenue isn’t affected by droughts or floods; that’s for the tenant to worry about.
Rural Farm Funds has a diverse portfolio of vineyards, poultry farms and almond farms (some of which are rented to Select Harvest (ASX:SHV)). They are also looking to expand into other fields (couldn’t resist that pun) such as cattle and other livestock, so watch this space.
Their portfolio is also geographically diverse, currently in 3 Australian states and looking for opportunities in other areas as well.
Rural farm funds helps their tenant having bought water rights themselves, giving water security for future tenants if the tenants haven’t secured water.
Some of Rural Farm’s rental agreements are 20+ years, with most having at least several years on the clock. With reasonable rental increases built in, it gives the tenant peace of mind and Rural Farms guaranteed income, translating into guaranteed distributions. They expect 4% distribution increases for quite a while based on the current portfolio. Although 4% doesn’t sound like much, starting with such a high yield is a strong combination. They also pay quarterly, which for an Australian stock, is an added bonus.
One final thing we like about Rural is that because they own sizeable pieces of farmland, it’s a good quasi way of owning land ourselves, even if it’s only a tiny part of that land.

Generation Healthcare (ASX:GHC)

Market size: $445m
Dividend yield: 4.36%

Generation Healthcare (ASX:GHC) is an REIT that only invests in healthcare properties. Healthcare businesses have had great performance for a while now and should continue to be one of the top performing sectors for a long time to come. By just investing in healthcare buildings and leasing to healthcare tenants, GHC can tap into this success but with a safer profile.
There is a wide spectrum of health buildings that GHC could own (and already do) such as retirement/aged care property, private hospitals, pathology, GP clinics etc.
GHC also appears to be buying in more affordable areas of cities, they get more bang for their buck in outer suburb areas. More families are moving into these areas as cities expand and it is good potential for increased real estate value (and rental income).

National Storage (ASX:NSR)

Market size: $541m
Dividend yield: 5.40%

National Storage (ASX:NSR) is one of Australia’s largest self-storage providers. They have more than 80 centres spread across Australia in various cities, with 412,000 square metres of rentable space. With society having increasing amounts of ‘stuff’ we need places to put everything. Smart IKEA storage can only get you so far, as new living spaces (such as apartments) continue to get smaller and more expensive per square metre, individuals and businesses will look for cheaper ways to store their things without having to pay for an extra room in their apartment.
National storage can fill this space by letting people fill their space. They are mostly located in areas which are exclusively industrial building estates, where there is no residential planning permission (currently). The land is usually cheaper as they aren’t competing with prospective apartment developers.
But if the land is reclassified in the future, National Storage can sell their land for a good profit and move elsewhere.

Cromwell Property (ASX:CMW)

Market size: $1.82B
Dividend yield: 7.81%

Cromwell is a global real estate investment manager who own property and run property funds. Most of their properties are office buildings (which isn’t that exciting) but we like that most of Cromwell’s tenants are Government bodies, they’re more likely to be sticky and long term than the average tenant. Another plus for Govt tenants; if they’re running at a loss, that department will stay open (the joys of public finances).

BWP (ASX:BWP)

Market size: $2.19B
Dividend yield: 4.87%

BWP (ASX:BWP) is a REIT that owns warehouses and leases them to hardware business Bunnings (part of Wesfarmers (ASX:WES) ), hence the initials stand for Bunnings Warehouse Property.
Bunnings has had stellar success for many years, dominating the hardware and sausage sizzle markets for a long time. Australia’s growth in population combined with the love for moving & renovating has seen both Bunnings and BWP prosper, the number of Bunnings continues to rise across the country.
Adding to this success is the demise of Woolworths’ (ASX:WOW) Masters business, which tried to copy and combat Bunnings but had mounting losses and forced Masters to close (which they are in the process of doing).

Unless a competitor (such as Mitre 10 or someone else) offers a good deal for Masters, Bunnings will cherry pick 10-20 Masters and take them over. We imagine if this happens a number of those will end up in the BWP stable.
The end of Masters will greatly benefit Bunnings; although Masters was making losses it was taking revenue away from Bunnings.
BWP is the only ‘retail’ related REIT we’ve listed here, so it might be affected by online shopping. Amazon hasn’t affected the domination of Home Depot or B & Q in the USA and UK, so if Amazon does set up shop in Australia, Bunnings should do just fine.

 

Thanks for reading this article about our investing journey Down Under.

Onwards and upwards!

13 thoughts on “5 Real Estate Investment Trusts (REITs) we’d like to own

  1. Vivianne

    Excellent diversification in the REIT category. Rural farm sounds fun, I know Australia is strong in farming export, so the prospect is many more years to come!
    Cheers!

    1. Dividends Down Under Post author

      Thanks for the comment and compliment Vivianne. That is also one another reason I like RFF, exports should continue to ramp up, so if they can grab land early, they should really benefit in the long run.

  2. Income Surfer (@IncomeSurf)

    Thanks for sharing about rural farms. My family owns one wheat farm, but farm prices had taken off by the time Mrs. IS and I had the capital to invest. This REIT may fill that gap until a good value comes along out our way. I’ll dig into it

    I hope you guys have a great weekend
    -Bryan

    1. Dividends Down Under Post author

      Hey Bryan, thanks for coming by 🙂

      That’s really cool your family owns a wheat farm. Do they run it or lease it to a farmer to farm? I hope you like what you read into RFF.

      We are having a great weekend, same to you.

  3. Roadmap2Retire

    REITs play a great role in a portfolio and provide some fantastic cash flow. One of my highest sectors generating income is real estate – and rightly so.
    Some good diverse picks there — love the fact that the top of your list is a farmland REIT…its something we are considering as well. We have REITs in various different subsectors, but farmland is one missing piece of the puzzle. There werent too many options in the N.American markets – but over the last couple of years, there have been some IPOs, so I think there are 3 companies that I can pick from.

    Looking forward to see where your investment $s go
    R2R

    1. Dividends Down Under Post author

      Hey R2R, thanks for commenting 🙂

      I agree, REITs are great and definitely have their place in any portfolio. We like all the REITs listed and they are pretty much in our preferred order. Funnily enough they are in reverse size order. It would be interesting if you did a piece on farmland REITs in North America, I’d enjoy reading it.

      I look forward to see where our investment $s go too 🙂

  4. Investment Hunting

    Thanks for this post. I’ve never heard of any of these REITs. I’m only invested in U.S. Reits. Do you know by chance what the tax implications are for a U.S. resident owning Australian REITs?

    1. Dividends Down Under Post author

      Hey IH, thanks for coming by 🙂 Glad I could expand your knowledge about some Australian REITs. I don’t know the tax implications, I did a quick Google but nothing really came up. I’m sure it can be done.

  5. ambertreeleaves

    Sound like a good plan to add some REIT to your portfolio.
    As part of our future dividend portfolio, REIT is key asset. In Belgium, we have some nice REIT in different sectors as well. They are obliged to pay 90pct of their profit to shareholders. It mean the the dividend fluctuates throughout the years, together with the profit. That makes the income stream a little unreliable.

    1. Dividends Down Under Post author

      Hey ATL, thanks for commenting 🙂 One of our next few buys will very likely be one of these REITs. I think most REITs in the world have a similar problem to what you’ve outlined.

      I suppose, just like companies, we need to pick ones that over time will have an ever growing distribution/profit, which is what I tried to pick with the 5 I’ve listed above.

  6. seekingreturns

    Nice diversity in your choices. Farmland REITs, however, haven’t performed as well as would be expected in the states. They tend to track the underlying commodity rather than the land value, out west there are water rights issues and there’s been dilution (via secondary offerings) that hasn’t been offset by increased value – perhaps due to overvaluing assets? In theory I agree with the premise – perhaps the landscape (pun intended) is different in Australia.

    1. Dividends Down Under Post author

      Hi there, thanks for taking time out of your day to read and comment on our blog 🙂

      I’m glad you noticed the diversity in the choices, diversification is important with shares in companies as well as REITs. It’s a shame the farmland REITs haven’t done so well, perhaps in the ultra long term it will all work out well for them. At some point we think RFF will pay a part in our portfolio. Maybe the landscape is different in Australia, who knows 🙂

  7. Pingback: Rural Farm Funds (ASX:RFF) share purchase | Dividends Down Under

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