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Why income seekers should consider this REIT’s 5.8% yield

There are several ways to get exposure to property as an investment. I think the best way is to invest in real estate investment trusts (REITs) on the ASX.

REITs have the potential for good income and good capital growth. One of the larger REITs out there is Arena REIT No 1 (ASX: ARF).

Most of Arena’s properties are childcare centres, it leases these to some of the biggest childcare providers in Australia such as G8 Education Ltd (ASX: GEM), Goodstart Early Learning and Affinity Education.

However, it also has a few medical properties which are leased to Primary Health Care Limited (ASX: PRY).

One of Arena’s stated aims is to ‘invest in specialised assets in growing sectors that are supported by favourable demographic and economic trends’.

There are several reasons why I think Arena is one of the best REITs on the market, here are a few:

  • 100% occupancy rate of its property portfolio
  • Weighted average lease expiry of 12.8 years across the portfolio
  • Return on equity of 24.7% for FY17
  • Average like-for-like rental increase of 4.3% in FY17
  • Gearing of 27.5%, which is quite low for a REIT
  • Distribution compound annual growth rate (CAGR) of 9.3% since FY13

The growth of the distribution has helped Arena achieve a trailing distribution yield of 5.45%, even though the share price has risen by 109% over the last five years.

Foolish takeaway

Arena recently revealed its annual result and has already pencilled in a 6.7% increase to the FY18 distribution, meaning the forward distribution yield is actually 5.82%.

Several companies that had big dividend yields have said they will reduce the dividend next year, such as Telstra Corporation Ltd (ASX: TLS) and G8 Education. The best way to avoid declining income is to invest in companies with growing dividends.

Where to invest $1,000 right now

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*Returns as of June 30th

Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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