One new skyscraper—and fewer retail stores—help support this REIT’s high yield

Faced with a changing real estate market in which retail properties lose ground to online shopping, the leading REITs will be those that make the most successful adjustments.

This Canadian REIT is completing a major skyscraper in New York City while it sells a group of retail and other less important properties. This should give the company a superior balance of industrial, office, retail and residential properties and help sustain its high-yielding distribution.

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H&R REIT (Toronto symbol HR.UN; owns 37 office properties, 153 retail properties, 99 industrial properties, 12 residential properties and 5 developmental projects in Canada and the U.S. It has a 33.6% stake in 225 other properties.

In all, these holdings include 42 million square feet of leasable space. The REIT’s overall occupancy rate is a high 96.0%.

The trust’s revenue fell 2.6% for the quarter ended September 30, 2017, to $289.6 million from $297.3 million a year earlier. The decline was largely due to the fact that the trust recently sold $1.08 billion worth of its less-important properties to pay down debt and invest in more promising properties.

However, cash flow rose 2.9% in the quarter, to $141.0 million from $136.9 million. Due to more units outstanding, cash flow per unit improved 2.2%, to $0.46 from $0.45.

Since January 1, 2016, H&R has sold $1.08 billion of its properties and used the proceeds to repay debt. It has also acquired $530.4 in new properties, primarily in the U.S.

Dividend Stocks: New York City complex due to see first tenants early in 2018

The company announced that it plans to sell all 79 of its wholly-owned U.S. retail properties. H&R puts the total value of these properties at US $750 million and it will begin with a sale of properties worth $250 million in the first quarter of 2018.  It also plans to sell off the 12 jointly-owned U.S. industrial properties it holds, valued at US $145 million.

Construction continues on a major U.S. project, H&R’s $1.2 billion, 1,871-unit apartment complex in New York City. This is a joint-venture partnership with U.S. real estate firm Tishman Speyer. Tenants are scheduled to begin occupying the first tower in early 2018. When occupied, the building should add $23.0 million U.S. to H&R’s annual cash flow.

H&R raised its monthly distribution 2.2% in December 2016. The $1.38 annual rate yields 6.6%. That payout is roughly 76% of cash flow. The units yield a high 6.5%.

The REIT’s units trade at a low 11.4 times its forecast 2018 cash flow of $1.85 a unit.

Recommendation in TSI Dividend Advisor: H&R REIT is a buy.

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