Should you buy these 3 retail real estate investment trusts set to benefit from higher retail trade?

Usually I work with a “bottom-up” strategy, where I start out with the company as an individual business and see what opportunities and risks that company may have. Another way is a “top-down” strategy where you might say a particular sector is promising, so you want exposure to it. The company in some ways becomes secondary to the potential gains of the sector.

The problem is that you may be right about the sector, yet wrong about the company you pick. You still need to know about what you are investing in.

I believe the next step from higher consumer spending and increased retail trade is that retail property owners and managers will see gains in rental income. Retail property rents can be based on the sales of the tenants’ business. If they experience a bump up in sales turnover, eventually that filters into rent increases.

As property owners will know, until a property goes up sufficiently in value and is sold, the only real income is rent, so it is important for real estate investment trusts (REIT) to maximise rental income.

Here are some retail REITs that could benefit from higher consumer spending and retail trade.

Charter Hall Retail REIT (ASX: CQR) is exposed to supermarket anchored neighbourhood and sub-regional shopping centres. You want to look at dividends and rental growth potential from new developments and acquisitions.

Its dividend yield is 7.6%. It added three newly acquired shopping centres, completed two redevelopments and started three new projects in the first half of FY2014. All this raised assets under management by 16%.

The trust concentrates on non-discretionary spending retail businesses to avoid the big ups and downs of cyclical sales. That keeps its earnings more stable. Reported NPAT was up 30% in the first half of FY2014 and profits have been trending up since 2010.

Westfield Retail Trust (ASX: WRT) has interests within a joint venture ownership of 46 major shopping centres. It offers a dividend yield of 6.8%. The portfolio had more than $920 million in redevelopments under construction.

In FY2013, earnings were up 2.3%. Returns on equity and capital were around 5%. Underlying net profit has been trending up since 2011.

BWP Trust (ASX: BWP) manages a portfolio of retail properties, most of which are Bunnings Warehouse properties. Its dividend yield is 6.3%. It acquired 10 Bunnings Warehouse properties in the first half of FY2014.

Rent increases resulted in a 14.7% rise in distributable profit and the half-year distribution per unit was up 2.4%.

This trust is linked to the growth of Bunnings Warehouse stores, so keep track of how many new stores are being built and how many enter the trust’s portfolio.

Foolish takeaway

Of these three, I am most interested in BWP Trust. I have been to a number of Bunnings Warehouse stores and I can see how popular the business is. Wesfarmers Limited (ASX: WES) owns the store chain and it wants to grow the business just as much as its Coles supermarkets.

The number of stores will increase and if BWP Trust acquires a fair proportion of them, it has good prospects for growth in revenue and earnings.

Get our top dividend stock for 2014 - FREE!

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2014."

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.