For retirees and income investors, the last few weeks have been like a gift from the heavens.
Due to fears of the U.S. Federal Reserve finally raising interest rates after nearly a decade of efforts to stimulate the economy, shares of interest-sensitive stocks are taking a beating on both sides of the border. Many stocks with high yields have sold off as much as 20-30% on nothing but the fears of interest rates creeping up a quarter of a point or half a point.
Investors looking for sustainable income should embrace this sell-off. Many of these companies are every bit as strong as they were just a few weeks ago, with earnings expectations that have remained unchanged. Investors who get in now have paid the same price for 10-30% more income, simply due to better timing.
This is exactly what’s happened with Cominar Real Estate Investment Trust (TSX:CUF.UN), one of the largest diversified REITs on the TSX Composite. Shares currently yield an eye-popping 8.2%, which is very attractive in today’s market, and are flirting with a new 52-week low. Does that make the company a buy, today? Let’s dig a little further.
The skinny
Cominar is one of Canada’s largest owners of property, owning more than 46 million square feet of space spread over retail, office, and industrial buildings. Approximately 80% of its property is in Quebec, making it the largest landowner in La Belle Province. The company had recently been working on diversifying outside of the province, but doubled back down when it acquired five million square feet of leasable area from a division of Quebec’s pension fund in late 2014.
While that acquisition has been immediately accretive to the bottom line, it has raised some concerns for investors. Firstly, there’s the thought that if a pension fund is getting rid of something, it might not be the greatest of assets since pension funds tend to be in it for the long term. The company also took on a lot of debt in the acquisition, and acquiring more property near its home base concerned investors who want the company to be less exposed to Quebec.
But it’s hard to argue with the results. Thanks to the big acquisition, net operating income was up more than 30% in the first quarter. Plus, the occupancy ratio increased year over year to 93.7% compared with 93.1% in the first quarter of 2014. Funds from operations stayed steady on a per-share basis because of shares issued to pay for the acquisition.
Additionally, the company trades at a pretty significant discount to the value of its assets. The company has a book value of $3.5 billion, while the market value of shares is just $3 billion. Based on that, investors who buy today are getting $21 worth of assets for the price of $18, which isn’t bad.
While this is all good news for investors in the stock, dividend investors have just one question. Is the 8.2% dividend sustainable?
The dividend
While it’s still early after the big acquisition, so far the dividend still looks pretty secure.
Based on the first quarter’s results of adjusted funds from operations of $0.38 per share and distributions of $0.368 per share, the dividend looks sustainable, albeit just barely.
But it’s a mistake to base the sustainability of the dividend on just one quarter, especially one that is traditionally the company’s weakest. In all of 2014 the company reported a total adjusted funds from operations of $1.86 per unit, which is good enough for a payout ratio of just 79%. Based on those results, that’s a very sustainable payout.
Although investors must be careful and continuously monitor their dividend holdings, especially those yielding more than 8%, Cominar looks to have a pretty secure payout. Combine that with the company’s low price-to-earnings ratio and the discount to book value, and I think investors should eventually be pretty happy with this company as it pays a generous dividend and as its book value eventually recovers.
