Getting a dependable 5% yield used to be as easy as going down to your local bank branch and putting some cash into a GIC. If you were willing to lock up your cash for five years, it was a piece of cake.
These days, the world is a different place. The most aggressive five-year GICs in Canada don’t even pay 3% now. If you go visit a branch of one of the “Big 5” banks, you’ll be lucky to get 2% annually, and that usually comes attached with big penalties if you withdraw your cash early.
Instead, I’d like to recommend you look at a different sector — real estate investment trusts. As much buzz as buying things on the internet gets, people are still going to keep shopping at stores. Even as retail traffic has declined, landlords have adapted by leasing space to real estate agents, dentists, and other professionals that benefit from the foot traffic brought in by an anchor tenant.
The shopping mall is alive and well, and it belongs in your portfolio. Here are three retail-focused REITs you should look at owning.
RioCan
When it comes to retail REITs, RioCan Real Estate Investment Trust (TSX: REI.UN) is the biggest and baddest of them all. The company has a market cap of more than $9 billion, and it owns more than 84 million square feet of space spread over 340 different properties. Unlike many of its competitors, RioCan also offers exposure to the U.S. market, where it gets a little more than 10% of its revenue.
RioCan’s tenant base is incredibly diversified. The company has more than 8,000 local tenants, and one of the company’s founding principles is to not have one company account for more than 10% of its total rent. At this point, RioCan isn’t even close to getting there; it’s biggest tenant is the new combination of Shoppers Drug Mart and Loblaw Companies, which account for just over 4% of its revenue. In short, not a big deal.
The only problem with RioCan is the yield. Since the stock has ran up lately, shares don’t quite hit a 5% payout. You’re looking at a dividend of 4.8%. That easily beats any government bond, but isn’t quite as attractive as the other companies I’m about to feature.
Calloway
Management at Calloway Real Estate Investment Trust (TSX:CWT.UN) thinks all of RioCan’s diversification is a terrible idea. In fact, Calloway gets more than 25% of its income from its main tenant, a sin that’s gotten plenty of retail REITs into problems in the past.
Fortunately for Calloway shareholders, the main tenant is about as strong as it gets. Calloway has Wal-Mart as the anchor tenant in 84% of its developments. Since Wal-Mart helps attract foot traffic, other retailers are then attracted to Calloway’s developments. This leads to a occupancy rate of 99%, one of the top in the sector.
Calloway shares currently yield 5.1%, and the company’s payout ratio is approximately 85%. There’s no need to worry about that dividend.
Crombie
Investors looking for a little extra yield might want to look at the owner of most of the real estate Sobeys and Safeway stores occupy, Crombie Real Estate Investment Trust (TSX: CRR.UN). Shares currently yield 6.7%.
The main reason why Crombie’s yield is higher than its peers is because the company took on a lot of debt when it acquired Safeway’s real estate as part of Empire Company’s acquisition of the chain in 2014. The total value of the real estate is approximately $3.1 billion, while the company owes $2 billion against it. Most other REITs in Canada have a loan-to-value ratio of around 50%, much lower than Crombie’s 65%.
But for investors who can look past the debt, Crombie might offer decent value. The company has room to increase its occupancy rate, which currently stands at 93%. It also can pretty easily afford the dividend, which is just over 80% of funds from operations. There’s also potential to refinance some of its existing debt at a lower interest rate in the future.
