Cominar Real Estate Investment Trust: Is the 10.4% Dividend Yield Safe?

Cominar Real Estate Investment Trust (TSX:CUF.UN) has an incredible dividend. But is it safe?

office building

If you’re an income investor, then you’ve probably considered some of the ultra-high-yielding REITs such as Cominar Real Estate Investment Trust (TSX:CUF.UN). Cominar has one of the highest dividend yields in the REIT space, but is the extra income worth the added risk?

Cominar’s 10.4% dividend yield is pretty enticing, but keep in mind that it’s an artificially high yield, meaning that the only reason the yield is high is because the stock has taken a nasty plunge. The stock has been in free-fall mode for nearly five years now, but, surprisingly, the company hasn’t slashed the dividend in half in this span.

Cominar is a diversified REIT which owns and manages approximately 539 office, retail, and industrial/mixed-use properties, which account for 25%, 31%, and 44% of the company’s property portfolio, respectively.

The retail and industrial/mixed-use properties have been seeing occupancy rates of 93% and more, but the office properties have an occupancy rate of 89.6%; I believe this rate will continue to fall as more employers opt for remote workers.

What will the workplace of the future look like?

Technology has improved by a huge amount, and it really doesn’t make much sense to have employees come to work every day. For an employee, it takes times and resources to go to work every morning, and it’s really not necessary to be present in an office in today’s age when the work can be done remotely.

Kirill Tatarinov, CEO of Citrix Systems Inc., believes that approximately 50% of the workforce will be remote by 2020. Many IT workers and professionals are already 100% capable of working from home today. So, as a business owner, it really doesn’t make sense to pay rent for office space when you could simply allow your employees to work from home. Employers are constantly looking for costs to cut, and it looks like office space is going to be one of these cuts.

The management team is focused on improving occupancy, but right now, it’s looking like a daunting task for the office segment, which I believe will continue to drag the company down. The increasing number of non-remote workers will be a long-term headwind, so Cominar is going to need to adapt and find new uses for its office space before things start to get uglier.

Is Cominar’s dividend safe?

The management team aims to be shareholder friendly, so they’ll do everything in their power to keep the current dividend intact, even if that means further extending the payout ratio. However, over the long term, I don’t see the company being able to sustain such a high payout ratio, which I think will continue to increase by a substantial amount over the next few years.

Office occupancies are unlikely to rise over the long term, so I’d steer clear of Cominar or any other REITs with a considerable amount of office exposure. I believe there are better high-dividend-yield options out there that aren’t as risky.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned.

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