Over the last few decades, one investing strategy has worked wonders. All investors needed to do was load up on Canada’s finest companies, hold them for a very long time, and they ended up doing pretty well. There’s little reason why investors shouldn’t expect the strategy to continue working. Canada’s best blue-chip stocks have the financial clout to protect their markets, the kinds of competitive advantages many companies can only dream of, and investor sentiment on their side. Betting against these companies is a difficult task. Many investors argue that real estate investment trusts (REITs) don’t have many inherent advantages over…
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Over the last few decades, one investing strategy has worked wonders. All investors needed to do was load up on Canada’s finest companies, hold them for a very long time, and they ended up doing pretty well.
There’s little reason why investors shouldn’t expect the strategy to continue working. Canada’s best blue-chip stocks have the financial clout to protect their markets, the kinds of competitive advantages many companies can only dream of, and investor sentiment on their side. Betting against these companies is a difficult task.
Many investors argue that real estate investment trusts (REITs) don’t have many inherent advantages over competition, with location being the one possible exception. Anything else can pretty easily be replicated. Thus, REITs should really just trade at values easy to define pretty much all the time. In other words, real estate becomes a commodity.
But there’s one REIT I believe has a big advantage over its competitors–an advantage that justifies its somewhat lofty valuation. That REIT is Smart REIT (TSX:SRU.UN). Here’s why it belongs in your portfolio.
Often, investors will hate when a REIT collects the majority of its revenue from one tenant. In that kind of situation, investors aren’t just taking general real estate risk. They’re also taking company-specific risk. What happens if the main tenant starts to go under?
The market is beginning to warm up to these types of REITs, however. Many of Canada’s largest retailers have recently created REITs that own their massive real estate holdings. It’s a win-win situation. The company retains control by keeping a majority of the shares of this new REIT, but still frees up capital it can invest in operations. Investors who buy the REIT get an attractive dividend and potential capital appreciation.
Smart does things slightly differently. The company has a long history with Wal-Mart Stores Inc. (NYSE:WMT), becoming that company’s developer of choice in Canada. Currently, some 27% of gross rental revenues come from the behemoth from Arkansas. That’s more than the next nine biggest tenants combined.
Investors don’t need to worry about this concentration. First of all, Wal-Mart is rock solid. The company continues to grow sales in Canada at a fairly reasonable pace, never mind its status everywhere else in the world. Wal-Mart is also protected from potential web-based threats because of its strong presence in online sales. Besides, Wal-Mart sells a lot of things that people haven’t really shown a desire to buy online–like groceries.
The presence of Wal-Mart is advantageous in another way, too. These stores attract massive amounts of foot traffic, which is attractive to other retailers, even ones that compete directly with North America’s largest retailer. Because of this advantage, Smart has a 98.7% occupancy ratio, one of the best of any REIT in Canada.
And finally, Smart’s portfolio is one of the newest among its peers. Remember, Wal-Mart has only been in Canada for a little more than 20 years. The portfolio is even newer than that, with an average age of approximately 13 years. New properties are less expensive to maintain, which leads to more cash being available for distributions.
A great dividend
Smart does have a relatively robust development portfolio in the works. If there’s a Wal-Mart being built somewhere, chances are Smart is the owner. This bodes well for growth going forward.
It also is good news for the dividend. When compared with other REITs, Smart’s yield of 4.9% is pretty low. Some of its competitors yield 7% or 8%. Certain investors might be more attracted to the bigger current yields.
But Smart has great dividend-growth potential. Funds from operations hit $2.10 per share in 2015, while the annual dividend payout is projected to be $1.65 per share in 2016. Even without any earnings growth, Smart only pays out 79% of its funds from operations to investors. With only a minimal amount of bottom-line expansion, Smart will be able to increase its dividend at least at the rate of inflation going forward, perhaps even more.
Smart REIT is truly one of Canada’s finest real estate companies. I think long-term investors could do a lot worse than owning it over the next decade.
Another great long-term stock pick!
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Fool contributor Nelson Smith has no position in any stocks mentioned.