The real estate investment trust (REIT) industry has suffered a sizable decline in share price over the last six months due to an expected interest rate rise from the Federal Reserve. However, the underlying businesses have hardly changed.
In my mind, this just makes the REITs more appealing. The main attraction to REITs is their high dividend yield, dependable revenue and exposure to property. The REITs still have dependable revenue and exposure to property, yet the dividend yield is even higher than it was a few months ago.
I think the following two REITs would make good additions to any Foolish portfolio:
Cromwell Group (ASX: CMW)
Cromwell Group is a direct property owner and property fund manager with a market capitalisation of $1.66 billion. In five years the share price has grown by 44% to $0.95 per share which includes the recent price decline. The share price has recently fallen 15% from $1.11 to today's price of $0.95.
Cromwell's dividend yield has increased to 8.82% thanks to this drop in share price, which looks very attractive to me, considering the dividend has increased every year since 2012 and increased by a total of 17% in that time.
It's been working on making its balance sheet more secure with the distribution payout ratio now down to 87% in FY16 from 94% in FY15. It also decreased its gearing down to 43% in FY16, down from 45% in FY15.
Cromwell is looking to grow its business organically but is also looking at a takeover offer for Investa Office Fund (ASX: IOF) which doesn't seem to be getting very far at the moment but may happen if the right price is offered.
Cromwell is currently trading with a dividend yield of 8.82%, management has forecast the dividend to be at least $0.034 cents per share for FY17. This means the forward yield is at least 8.825%.
National Storage REIT (ASX: NSR)
National Storage is the largest self-storage provider in Australia and it has a market capitalisation of $755 million. It has 108 centres across Australia and New Zealand and just announced it will be acquiring another centre in Artarmon, Sydney for $10.75 million.
In FY16 it grew its portfolio by 23 new centres and grew underlying earnings by 20%. This resulted in earnings per share of 8.7 cents and management have forecast FY17's estimated earnings per share to grow between 5.7% to 8%.
If the average size of an Australian home continues to decrease in size, there is likely to be continued demand for the space that National Storage rents out.
National Storage currently has a dividend yield of 5.88%. It's expected to increase its dividend to 9.2 cents per share which means a forward yield of 6.13% for FY17.
Foolish takeaway
These two REITs have shown they can successfully grow earnings and distributions year to year. As the share price decreases, it increases the starting yield and becomes more attractive in my eyes.
I'd be happy to add either REIT to my portfolio after the market digests the Fed's decision on 14 December (USA time), but if I had to pick one out of the two I'd pick National Storage because it's less leveraged.
