Feeling gouged by high grocery prices? Bummed out by bank runs? Sick of stock market volatility?
With inflation and rising interest rates creating turmoil in the economy and financial markets, these are tough times to be a consumer – or an investor.
Well, today we’re going to kill two birds with one stone (or feed two birds with one seed, as my daughter likes to say). We’re going to put some of that grocery money back in your pocket and help you sleep better even as markets gyrate.
The following real estate investment trusts have several things in common. First, all three derive a large chunk of their rental income from grocery stores, drug stores and other defensive businesses. Second, all pay monthly distributions that yield more than 5 per cent. Third, because their revenue comes largely from non-cyclical businesses with long-term leases, their unit prices tend to be more stable than those of some other investments. What’s more, all three REITs featured here maintained their distributions throughout the pandemic, even as many other REITs cut their payouts.
In addition to their defensive characteristics, they also offer modest potential for growth thanks to their property development pipelines, which include retail, residential, industrial and mixed-use projects.
A caveat: Developing real estate is a time-consuming and capital-intensive business. None of these REITs is likely to deliver substantial capital gains or big distribution increases in the near term. What they do offer are stable payouts that yield more than many dividend stocks. That makes them suitable candidates for investors seeking above-average income as part of a well-diversified portfolio. Remember to do your own due diligence before investing in any security.
Choice Properties REIT (CHP-UN-T)
Price: $14.09
Yield: 5.3 per cent
Choice Properties is Canada’s largest REIT, with more than 700 retail, industrial, office, mixed-use and residential properties valued at an estimated $16.2-billion. Created a decade ago when Loblaw Cos. Ltd. spun out a large chunk of its real estate, the REIT derives about 80 per cent of its net operating income (NOI) from retail tenants such as Loblaw, Shoppers Drug Mart, Dollarama and Canadian Tire. Choice also has a growing industrial portfolio that accounts for about 15 per cent of NOI. (NOI, a measure of real estate profitability, is essentially rental revenue minus operating costs.) After holding its distribution steady for several years following its merger with Canadian REIT in 2018, Choice hiked its payout by 1.4 per cent in February. “From our perspective, valuation is well-supported by the defensive strengths of its portfolio, durable cash flows, steady growth profile, below average leverage, and sizeable pipeline of value-add opportunities,” said Pammi Bir, an analyst with RBC Dominion Securities, in a note. Mr. Bir rates Choice “sector perform” with a price target of $16, supported by its strong and stable occupancy (currently 97.8 per cent), rising rents and falling bad debts.
Crombie REIT (CRR-UN-T)
Price: $14.49
Yield: 6.1 per cent
Crombie REIT is 41.5-per-cent owned by Empire Company Ltd., whose grocery banners include Sobeys, FreshCo and Safeway. Thanks to this relationship, Crombie derives about 80 per cent of its rental revenue from grocery-anchored properties and other real estate that serves the retail food business. Crombie’s focus on tenants catering to everyday needs contributed to record-high committed occupancy of 96.9 per cent across its $5.6-billion real estate portfolio in the fourth quarter, as same-property NOI rose 2.4 per cent. “In our view, [fourth-quarter] results demonstrated the resilience of the REIT’s retail portfolio,” said Kyle Stanley, an analyst with Desjardins Securities, in a note. He rates Crombie’s units a “hold,” with a price target of $18. Distribution growth is not Crombie’s strength: It has paid the same monthly distribution of 7.417 cents per unit since 2008, although it declared a one-time special distribution in 2020. Let’s hope that under new president and chief executive officer Mark Holly, who joined Crombie from Empire on March 1, the distribution won’t remain stuck in neutral for the next 15 years.
SmartCentres REIT (SRU-UN-T)
Price: $25.83
Yield: 7.2 per cent
One of SmartCentres’ key advantages is its relationship with grocery and general merchandise giant Walmart. With more than half of SmartCentres’ 185 properties anchored by a Walmart store, the REIT’s $11.9-billion portfolio boasts occupancy of 98 per cent. SmartCentres’ other retail tenants run the gamut from big-box stores such as Home Depot to fast-food chains such as McDonald’s. But its ambitions go beyond retail. In recent years, it has been transforming itself into a diversified REIT by developing condos and apartments, industrial real estate, offices, seniors housing and self-storage facilities. “With a largely stabilized portfolio supported by a rock-solid national tenant base (notably Walmart), SRU’s extensive development pipeline remains a key driver of future growth,” said Dean Wilkinson, an analyst with CIBC Capital Markets, in a note. He rates SmartCentres “outperform” with a price target of $34. Prior to the pandemic, SmartCentres had been raising its distribution annually, but given its already rich yield, I’m not holding my breath for further increases until the unit price moves higher.
Disclosure: The author owns all three REITs personally and holds CHP.UN and SRU.UN in his model Yield Hog Dividend Growth Portfolio. View the portfolio online at tgam.ca/dividendportfolio
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.