Looking for a good investment idea amongst real estate investment trusts? Then you have a variety of specialised property investments, residential, commercial, industrial, office – even ones that deal in pubs or retirement communities, to consider.
As an investor, we want, first and foremost, to see that our funds are going to grow at a rate that will pay us for our time, since we aren't chasing quick gains from some hi-tech IPO listing. Just as buying property privately is not usually done by buying one year and selling the next (except for at a loss), investing into a REIT is simply entrusting your money with an organisation that hopefully has a lot of experience and skill at picking properties to buy at reasonable or bargain prices.
So which REITs are best for new investors?
Goodman Group (ASX: GMG) has many of the good qualities needed for steady earnings and investor returns.
Geographical diversity
It invests in and manages commercial and industrial properties in Australia, New Zealand, the UK, North America, Europe and Asia. The geographical diversification protects it from cyclical downturns involving most or all of its properties at the same time. It can also acquire properties in a region when it is depressed, and get more return when they recover later.
Revenue and earnings growth
The past two years have seen strong growth, rising up from $306 million in NPAT to $566 million for 2013, returning to earnings levels seen before the GFC. Its total shareholder return over the past five years has been an average annual 37.85%, with its share price rising from about $3.20 in early 2012 to its current $4.67.
The world economy is recovering and regions like Asia and even the US are growing again, so real estate will start growing along with them. This is especially true in South-East Asia where some of the countries have GDP growth of 5% -7%.
It has $24 billion of assets under management and it generated $270 million in property income in 2013. In addition to its net income from investment sales, its FY 2014 full-year earnings guidance is an operating profit of $594 million. That works out to be a 6% rise in operating earnings per security to 34.3 cents per share (cps) and a 7% increase to distributions of 20.7 cps.
Financial strength
Its return on equity is 9.89%, which is toward the top end when compared to other REITs such as DEXUS Property Group (ASX: DXS) at 9.86%, GPT Group (ASX: GPT) at 8.34%, or Lend Lease Group (ASX: LLC) at 12.79%.
Its debt levels are low, with a gross gearing of 38.55% and at the end of 30 June 2013, its $2.56 billion in long-term debt was only 4.53 times its $566.4 million NPAT, so borrowings are at a manageable level. Real estate investment commonly involves high gearing for borrowings.
Foolish takeaway
I think Goodman Group is probably the best REIT that new investors can comfortably add to their portfolio if one isn't there already. Property appreciates over time, so future returns will come as the routine rental income generates a steady earnings base. It has a 4.14% dividend yield, and even though its 1.38 price to book value is one of the higher ones among the major REITs, the value and future earnings growth potential justify it.
