A Milestone Among REITs

10/14/2014 8:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Our top pick for the month is a Dallas-based operation that is the largest real estate investment trust listed on the Toronto stock exchange that focuses solely on the United States multifamily sector, explains Gordon Pape, editor of The Income Investor.

The portfolio held by Milestone REIT ((TSX: MST.UN), (OP: MSTUF)) consists of 57 multifamily garden-style residential properties, comprising 18,772 units in 12 major metropolitan markets throughout the Southeast and Southwest US.

The REIT—which completed its IPO in March 2013 at a price of $10—operates its portfolio through its internal property management company, Milestone Management, LLC, which has more than 900 employees across the United States.

With the probability of higher interest rates next year, I prefer residential REITs right now because they have more flexibility to raise rents than companies which focus on office buildings and malls, where contracts are normally for longer terms.

I also like this REIT's focus on the US, where the housing market is gathering strength. Milestone operates in high-growth areas of the US with properties in Texas, Arizona, Utah, Colorado, Florida, Georgia, and Tennessee.

During the quarter, Milestone made acquisitions in Orlando, Florida, and Atlanta, Georgia for a total cost of $78.7 million.

Income seekers will be especially attracted by the REIT's higher-than-average yield, currently running at 6%. The REIT pays monthly distributions of C$0.05417 per unit (C$0.65 per year) to yield 6% at the current price.

For tax purposes, distributions to Canadians will be considered as income, return of capital (ROC), or a combination of both. In 2013, the entire amount paid out was treated as return of capital.

US shareholders will not be subject to any withholding tax and income payments will be treated the same as if they were received from a US REIT.

Milestone shares are suitable for investors seeking above-average yield who are willing to accept a little more risk. The shares trade actively on the Toronto exchange.

They are also listed on the over-the-counter Pink Sheets in the US but the average daily volume is very light. If you must buy there, place a limit order, and be patient.

Summing up, Milestone REIT offers investors an opportunity to participate in the US multifamily residential market with attractive properties in high-growth areas.

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