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Cominar REIT: Is the 11% Yield Safe?

Cominar REIT (TSX:CUF.UN) has been hammered, falling north of 43% over the past five years. The distribution yield is at a whopping 11.16%, which may grab the attention of aggressive income investors, but is a cut imminent? Or is there a way that Cominar will be able to keep this distribution intact as it continues to fall further into the abyss?

Cominar recently reported a very underwhelming earnings report which sent the stock further into its hole. Sure, the distribution looks juicy, but you had better be used to stock price depreciation as the bottom may not arrive for many years.

Cominar has an artificially high yield, which means that the only reason why it’s so high is because the stock price has declined by such a huge amount. When stock prices go down, yields go up and vice-versa, unless there’s a dividend or distribution cut, which is typically done to bring the payout back to sustainable levels.

If you’re not familiar with Cominar, it’s a diversified REIT which owns a mix of office, retail, and industrial/mixed-use properties. It’s the largest commercial property owner and manager in Quebec, which I believe is a very attractive market that has seen ample growth, but Cominar can’t seem to thrive given it’s operating in a favourable environment.

The office properties have seen a lower occupancy rate of late, and I believe this number is going to continue to drop as employers become open to a work-from-home model.

Office segment headwinds may pick up

Many workers across various fields are now able to do all of their work remotely. Employers are finding that renting office space is a waste of money and that remote workers are usually happier and, in some cases, more productive.

Wouldn’t communication be an issue for remote workers? Remote workers usually need to communicate with colleagues and their bosses, but this doesn’t need to be done physically. There are many technologies that allow remote workers to communicate effectively with teammates or supervisors, whether it’s through instant messaging or video conference calls. I believe office vacancies will continue to rise over the next few years, and office REITs will need to find new uses for unused space.

Is the distribution yield safe?

I think the distribution is relatively safe in the short term. The distribution will probably continue to increase as the stock continues its decline, and it’s likely that Cominar will be required to sell some of its assets to raise capital.

It looks like the management team will do everything in their power to keep the distribution intact, but this doesn’t mean you should start loading up on shares. Sure, the 11.16% yield looks attractive, but you’re most likely going to suffer much bigger losses, so it doesn’t make sense to buy right now.

There are better high-yield options out there that don’t require you to catch a falling knife.

Stay smart. Stay hungry. Stay Foolish.

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

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