In the nearly five years since I launched the model Yield Hog Dividend Growth Portfolio, one investment stands out for its abysmal timing.
In February, 2020, I initiated a position in SmartCentres Real Estate Investment Trust SRU-UN-T. Less than three weeks later, the World Health Organization declared COVID-19 a global pandemic, sending the stock market into a panic.
Retail REITs such as SmartCentres took a direct hit, as public-health authorities ordered many stores to close and some tenants stopped paying rent. SmartCentres units, which had traded at more than $31 before the pandemic, plunged to as low as $15.
As much as I regretted the purchase, I held on. My resolve strengthened after I spoke to Mitchell Goldhar, SmartCentres’ founder. He said the depressed unit price was wildly out of line with the REIT’s long-term prospects. Already the REIT’s largest shareholder, he was adding to his position.
“This is one of those moments people will look back on and regret not taking advantage of this significant discount to real value,” he told me.
Mr. Goldhar nailed it. Since then, SmartCentres’ business has bounced back and its unit price has nearly doubled from its pandemic low. What’s more, SmartCentres has maintained its distribution throughout the pandemic, while many other REITs slashed their payouts.
The lesson here is that it often pays to invest when markets are overcome by fear and pessimism. Although I didn’t catch the bottom – not even close – I also subsequently acquired more SmartCentres units for my model portfolio for about $25 each.
Today, I’m announcing the purchase of an additional 35 SmartCentres units, bringing the total to 150 units in the model portfolio. (Disclosure: I also own the units personally.) These units were acquired at Monday’s closing price of $29.01, for a total cost of $1,015.35. Here’s why I’m still bullish on SmartCentres even after the rebound in its unit price.
A defensive retail portfolio
SmartCentres’ largest tenant is Walmart, which anchors more than two-thirds of its 174 retail properties across Canada. Other major tenants include Loblaws, Metro, Sobeys, Shoppers Drug Mart, Canadian Tire, Dollarama and the big banks. These are all strong, entrenched businesses that cater to the essential needs of consumers and can weather recessions, inflation and whatever else the economy throws at them.
Leasing and occupancy looking up
With consumers heading back to bricks-and-mortar stores now that pandemic restrictions have been lifted, SmartCentres’ leasing activity continues to strengthen. In the second quarter, occupancy rose to 97.6 per cent, including committed leases, up from 97.2 per cent in the first quarter. Cash rent collections have also steadily improved and topped 98 per cent in the second quarter.
“This quarter highlights the main traits that can be used to define SRU: safe, secure and stable,” Dean Wilkinson, an analyst at CIBC World Markets, said in a recent note.
Much more than a retail REIT
Under Mr. Goldhar’s leadership, SmartCentres has evolved from a retail-focused REIT into a diversified real estate company with a deep development pipeline. The REIT generates a growing chunk of its rental revenue from offices, apartments and self-storage facilities, with development income from condo and townhome sales also contributing to the bottom line.
Opening up yet another avenue for growth, SmartCentres recently announced its first industrial development with the purchase of about 38 acres of land in Pickering, Ont.
A high – and secure – yield
SmartCentres currently distributes 15.417 cents a month, or $1.85 annually, to unitholders. Based on Friday’s closing price of $28.26, the units yield an attractive 6.5 per cent. SmartCentres had raised its distribution for six consecutive years before the pandemic prompted it to put increases on hold, but the current distribution appears to be very sustainable.
According to SmartCentres, its payout ratio based on adjusted cash flow from operations was 94 per cent for the 12 months ended June 30. Analysts expect the payout ratio will fall in the years ahead, potentially opening the door for a resumption of distribution hikes.
Closing thoughts
SmartCentres’ solid retail tenants, diversified portfolio and strong development pipeline make it an attractive pick for investors seeking steady income and modest growth. What’s more, the REIT is trading at roughly an 11-per-cent discount to the net asset value of its properties, compared with an average 6-per-cent discount for its retail REIT peers, Pammi Bir, an analyst with RBC Dominion Securities, said in a recent note. “At current levels, we see a nice mix of value and growth from a name equipped with defensive assets, a major pipeline of value-add opportunities, and a proven platform,” he said.
I have no idea what the unit price will do in the short run, but over the long run I expect SmartCentres will reward patient investors.
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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