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Gordon Pape: Two REITs to consider for an income portfolio

The REIT market has softened recently as investors price in the expected December rate increase by the U.S. Federal Reserve Board. The price retreat has had the effect of raising yields, creating an opportunity for income-seeking investors to establish positions or add to existing ones. Here are two REITs that I have recommended to readers of my Income Investor newsletter in the past and still consider to be buys.

Chartwell Retirement Residences REIT

Current price: $14.94

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First recommended: Jan. 15 at $12.34

Annual payout: 56 cents

Yield: 3.76 per cent

Risk: Conservative

Comments: Chartwell has performed very well for us since I recommended it in my newsletter in January. The market price is up $2.66 a unit, and we continue to receive monthly distributions of 04.6818 cents (about 56 cents a year) to yield 3.75 per cent at the current price.

Second-quarter results were very good. Total adjusted funds from operations (AFFO, the main financial standard for assessing REITs) was up $5.7-million or 16.6 per cent to $39.8-million (21 cents a share, fully diluted). For the first half, AFFO was $78.3-million (42 cents) compared with $65.5-million (36 cents) a year ago.

Same-property net operating income (NOI) was up $4.2-million (8.4 per cent).

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"Looking forward, we are confident that the strategic capital allocation and financing decisions we made in 2015 and 2016, particularly in repositioning our portfolio to higher quality, internally managed assets in Canada, will continue to support our future earnings growth," commented chief executive Brent Binions.

The company continues to expand with the latest project being the start of a 128-suite residence in Oakville, Ont.

Pure Industrial REIT

Current price: $5.38

First recommended: Jan. 21, 2012, at $4.60

Annual payout: 31.2 cents

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Yield: 5.80 per cent

Risk: Higher risk

Comments: It has taken a while, but investors have finally woken up to the potential in this industrial properties REIT. Except for a brief dip at the beginning of October, the share price has been on an uptrend for most of this year.

One of the reasons is the REIT's aggressive expansion, which has raised its profile. In October, management announced a series of transactions that expanded the portfolio significantly. They included four single-tenant and four multitenant industrial properties in Alberta, comprising an aggregate of 1.2 million square feet of gross leasing area (GLA). PIRET, as it is called for short, is paying $171.1-million for the properties, representing a 6.3-per-cent ongoing cap rate. The properties have a 98-per-cent occupancy rate.

"The quality of the portfolio we are acquiring in Alberta is very high, and the majority of those assets will form part of our core portfolio moving forward," CEO Kevan Gorrie said. "Although the acquisition will increase our concentration in Alberta in the short term, we intend to reduce our overall exposure in time through the sale of a partial interest in certain assets to joint-venture partners and the selective disposition of non-core assets."

PIRET has also entered into a conditional agreement to acquire a portfolio of income-producing properties in the southeastern United States for $106.3-million. This consists of six properties comprising approximately 1.6 million square feet of GLA.

PIRET also said work has started on the previously announced 330,000-sq-ft development project in Richmond, B.C. In total, the acquisitions and the Vancouver development will add 3.1 million square feet to PIRET's gross leasable area.

To finance all this, the REIT issued almost 27 million new shares at $5.35 in a bought deal that generated gross proceeds of almost $144-million. The shares are now trading above the issue price.

Ask your financial adviser whether these securities are suitable for your portfolio.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.

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About the Author

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. More

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