Real estate investment trusts (REITs) have been one of the best investment classes to own over the past five years. They can provide solid income and long-term capital growth if you choose the right one.
Not every REIT is worth a buy. Some have a very bad debt position whilst others, such as office buildings, face a potential slowdown.
One of the best REITs in my opinion is Arena REIT No 1 (ASX: ARF). Here are three reasons why:
Geographically diverse portfolio
Arena's property portfolio is mostly childcare buildings spread across the country. Being geographically diverse means it mitigates any big risks if there is an oversupply of childcare centres in one particular region. Some of its biggest tenants include Goodstart Early Learning, Affinity Education and G8 Education Ltd (ASX: GEM).
It also owns some healthcare buildings which are leased to Primary Health Care Limited (ASX: PRY). Healthcare is a great industry to lease to because of its long-term growth tailwinds of the ageing population. I hope Arena continues adding to its healthcare portfolio.
Impressive growth
Investors wouldn't associate a strong growth rate with a REIT but that's exactly what Arena is achieving.
In its latest results to 31 December 2016 it reported that operating earnings per share increased by 11% and the distribution per security increased by 9%. It also showed that its distribution has grown with a compound annual growth rate (CAGR) of 10% over the past four years.
All of this growth has been achieved with a debt leverage of 27.8%, which is quite low compared to most REITs.
Supportive policy
This REIT would still be an attractive choice without any government assistance. However, both of the large political parties of Australia want to help parents by assisting with childcare payments. This indirectly helps Arena because it helps its tenants.
As long as that policy remains then Arena can rest assured knowing that its tenants are receiving additional funds.
Risks
There are two main risks in my opinion. One is that a potential oversupply of childcare centres would be bad for Arena in the long-term.
The second is that in a prolonged downturn it may find parents lose their jobs and stop taking their children to childcare. This could cause damage to growth and the value of the properties.
Foolish takeaway
I think a few REITs deserve a place in investor portfolios, particularly for retirees who are looking for income. Arena is trading with a trailing distribution yield of 5.74% and should keep growing at a good pace over the next year or two.
