I am tempted by the yields of real estate investment trusts, but with coronavirus cases surging again I am worried that the market could take another hit. Are there any REITs you consider safe even in a second wave?
Given the highly uncertain economic outlook, I wouldn’t label any investment – REIT or otherwise – as totally “safe." That said, based on what happened during the first wave of the coronavirus, I believe some REITs are better positioned than others to ride out another spike in infections.
When evaluating REITs, tenant stability is critical. If tenants can’t pay their bills, the REIT’s cash flow will suffer, potentially putting its distribution at risk. Each of the three REITs discussed below has a highly stable major tenant that accounts for a large percentage of the REIT’s cash flow. These anchor stores, for the most part, experienced very little disruption during the first wave.
Another important factor is a REIT’s “weighted average lease term," or WALT, which measures the remaining length of leases. Thanks to their long-term agreements with major tenants, all of the following REITs have WALTs at or above the average for the sector. “In uncertain times, longer WALTs are coveted for longer-duration cash flow profiles and presumed greater [income] stability,” Jenny Ma, an analyst at BMO Nesbitt Burns, said in a research note.
Finally, all three of these REITs (which I own personally) have solid balance sheets, distributions that analysts consider sustainable and long-term growth potential from development projects. Don’t buy these REITs if you’re hoping for a quick capital gain, but if you’re seeking stable cash flow during these uncertain times, they are worth considering.
Choice Properties REIT (CHP.UN)
- Price: $12.27
- Yield: 6 per cent
When the pandemic hit, grocery stores were one of the few bright spots. Sales of everything from toilet paper to canned goods surged as consumers avoided restaurants and hunkered down at home. Fortunately for Choice Properties REIT, it derives about 56 per cent of its gross rental revenue from Loblaw Cos. Ltd. chains, including Loblaws, No Frills, Real Canadian Superstore and Shoppers Drug Mart.
Bolstered by its highly stable Loblaw tenants, Choice collected 94 per of July rent across its real estate portfolio – which also includes office, industrial and residential properties – and occupancy at the end of the second quarter was a healthy 96.8 per cent.
“The Loblaw leases provide stability to the REIT’s portfolio, with a weighted-average lease term of 7.8 years, one of the highest in the sector,” analyst Dean Wilkinson of CIBC World Markets said in a July note. Although the REIT’s payout ratio – estimated at about 93 per cent of adjusted funds from operations (AFFO) for 2020 – is higher than in previous years, Choice’s strong liquidity and long lease terms support the current distribution, Mr. Wilkinson said. Longer-term, Choice’s $1.1-billion development pipeline, which includes retail, residential, industrial and mixed-use projects, will create additional value, he said.
- Price: $13.05
- Yield: 6.8 per cent
Crombie REIT benefits from its relationship with supermarket operator Empire Co. Ltd., which owns about 42 per cent of the REIT and whose Sobeys, Safeway, FreshCo and other banners account for about 54 per cent of the REIT’s annual rent. Providing additional stability, the Empire leases have an average of 13 years remaining, BMO’s Ms. Ma said.
According to Crombie’s latest investor presentation dated Aug. 31, 97 per cent of the REIT’s tenants over all – which also include banks, pharmacies, dollar stores and government offices – are open, and total rent collection in July was 93 per cent. “Against a backdrop of fundamental pressures in retail and economic turbulence, we expect [Crombie’s] portfolio to remain comparatively resilient, supported by its significant weighting in essential needs tenants,” Pammi Bir, an analyst at RBC Dominion Securities, said in a note.
Crombie does have an elevated payout ratio, which analysts forecast will climb to more than 100 per cent of AFFO in 2020. However, analysts say the distribution is sustainable, as the payout ratio is expected to fall to less than 100 per cent in 2021 and subsequent years, helped by retail and residential development projects now under construction.
- Price: $13.72
- Yield: 5.9 per cent
Even as coronavirus-related lockdowns prompted several Canadian REITs to slash their payouts, CT REIT signalled its confidence by raising its distribution. The 2-per-cent increase announced in August won’t make anyone rich, but it does underline the resilient nature of CT REIT’s properties. Nearly 92 per cent of CT REIT’s rent comes from Canadian Tire Corp. Ltd. stores, including affiliated banners such as Mark’s, Sport Chek and Pro Hockey Life. These stores have an average remaining lease term of more than nine years. In another sign of strength, CT REIT collected 98.5 per cent of July rent and its occupancy rate at the end of the second quarter was 99.3 per cent.
“Owing to its strategic relationship with Canadian Tire … CRT’s financial performance was virtually unscathed” during the second quarter, Desjardins Securities analyst Michael Markidis said in a note. CT REIT typically announces distribution increases in the fall with third-quarter results, and the surprise August hike “should leave the door open for another increase in [the second half], provided the operating environment does not meaningfully deteriorate,” Mr. Markidis said.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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