I think that a few real estate investment trusts (REITs) could be worth owning for income.
There is a small danger that future rising interest rates could be a negative for REITs, but I don’t think the RBA is going to do much with interest rates over the next few years. I view short-term worries about inflation as a buying opportunity for quality REITs.
Rural Funds Group (ASX: RFF)
Rural Funds is a farm property owner. It will soon be the only one of its type on the ASX.
It is invested in a few different sectors of farmland like nuts, cattle and vineyards.
One of the ways that Rural Funds can protect against inflation is that some of its rental income increases with CPI inflation. The other contracts have an annual 2.5% fixed increase.
The REIT looks to grow its distribution for unitholders by 4% each year. That’s a decent increase in today’s world, in my opinion. The steady income growth is the biggest reason why I like Rural Funds.
It’s not too heavily geared and it’s converting some of its farms to higher and better uses.
For the 2022 financial year, Rural Funds is expecting to pay a distribution of 4.9%.
National Storage REIT (ASX: NSR)
National Storage is the largest self-storage business across Australia and New Zealand with 206 locations.
The benefit of self-storage properties is that they can steadily benefit from rising land values and charge higher rent. More of the value is in the land rather than a building which generally depreciates over time.
National Storage facilities are usually located in good locations which could eventually become a residential location and worth more.
Over the long-term it’s seeing an increase in revenue per square metre as well as maintaining a good occupancy rate. This means it’s generating good rental profit compared to the land value. In HY21 its total portfolio occupancy improved 7.7% to 85.4% and ‘same centre revenue per available square metre increased 11.4% to $217.
National Storage is also steadily acquiring other facilities to expand its portfolio and benefit from scale. In the first half of FY21 it settled on 18 acquisitions worth $258 million. It also has 19 active developments providing a net lettable area pipeline of approximately 130,000 square metres.
It currently has a distribution yield of around 4.25% for FY21.
