Commercial real estate took a hammering during the 2020-21 slump. But I think there’s a profitable long-term future in the sector, and I’m eyeing up some real estate investment trusts (REITs) to buy for 2022 and beyond.
One is NewRiver REIT (LSE: NRR). First-half results released Thursday sent the share price climbing 15% in early trading. Chief executive Allan Lockhart kicked things off, saying: “We are pleased to report that in the first half of FY22 our operational and financial metrics have improved significantly.”
Underlying funds from operations climbed 67%, to £15.5m. And retail net property income is up 6.8%, to £25.2m. The trust did post IFRA losses. But with rent cash collection in the half averaging 90%, this looks like the start of a sustainable turnaround to me.
The period included plenty of asset disposals, with the Hawthorn pub business offloaded for £224m. Retail disposals progressed according to plan too. Net debt, as a result, fell 44% in the period to £276.4m. I’m steering clear of companies carrying high debt, but this looks fine to me.
A year ago, it might have seemed like madness to consider investing in a retail real estate investment trust. But I’m seeing a leaner and fitter outfit here.
Healthy REIT
The Primary Health Properties (LSE: PHP) share price remained steady through the stock market crash. At the time of writing it’s up 5.3% over the past 12 months, and has gained a respectable 35% over the past five years.
On top of that, this real estate investment trust has been paying dividends yielding around 4%. All in all, I find a steady performance like that comforting in these scary volatile days. Why has it been performing so solidly?
Primary Health Properties invests in healthcare real estate in the UK and Ireland. Its properties are let on long-term leases, to GPs and to government health bodies. And that, I think, provides security. I see a nice safety barrier there, with clients who are not going to go away. It also makes for predictable income, which helps underpin the trust’s progressive dividends.
I surely won’t get rich quick if I invest in PHP. But I do think it could provide a steady income stream.
Online sales revolution
I can’t ignore Tritax Big Box (LSE: BBOX). During the retail crunch, online sales have been soaring. And that has been pushing up the demand for warehouses and logistics infrastructure, in which Tritax invests.
As a result, the Tritax share price has gained 45% over the past 12 months. And it’s up 84% in five years. The downside, though, is valuation. While the shares have soared, the underlying assets have not kept up.
Tritax shares are now trading at a premium of around 29% to net asset value per share (NAV). But that measure doesn’t tell the whole story, as it does not account for the income side of the investment. Dividend yields have been running at around 4%, which does not suggest overvaluation to me. And I reckon that helps offset concerns about the premium share price.
The risks of REITs? Covid-19 is on the rise again across Europe, and economies are still fragile. I reckon there’s a good chance of a 2022 stock market slump, and that could hit the REIT business. But these three are on my 2022 candidates list.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties and Tritax Big Box REIT. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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