“Secure income” REITs

22 Mar 2019 / Insight

By Mike Foster

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“Secure income” REITs have created wealth rather than merely preserving it. Through the cycle – even investing in 2007, i.e. at the top – our proxy for “secure real estate assets” (primary medical real estate) beat bonds, equities and other real estate by a handsome margin, and with lower annual volatility. Even in the five difficult years from end-2007, Primary Health Properties (PHP), a REIT that invests in localised primary hub medical healthcare assets, generated a total annual return on assets of 5.6%, well above the 0.5% from All-property.

Asset values are attractive. The REITs assessed have an average NIY (net initial yield) of 5.5% mean and 5.3% median, which is above the market as a whole (5.0%). That gives them a good investor income “head start”. It supports the assets’ valuation prospects and, more importantly, makes for a great engine to drive dividend pay-outs. We think slowing global economic trends point to a repeat of this, with rising (not falling) returns for investors in UK REITs focused on secure income streams. We look at the macroeconomic trends relevant to ratings of such REITs, and assess a range of 17 UK REITs seeking such income streams. Dividends are the surest drivers to sustained, cash-backed total returns and the REITs we assess here offer attractive dividend characteristics. We conclude that now is the time to seek vehicles with visible long-term income streams.

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