If I told you there is a REIT trading on the TSX that’s currently yielding 6.5% and has raised its payout for 16 consecutive years, you’d probably be interested.
If I told you it has a $440 million market cap, you’d probably take a pass. That’s especially true when talking about REITs. Investors want to own the big shiny kind like RioCan Real Estate Investment Trust (TSX:REI.UN) and Choice Properties Real Estate Investment Trust (TSX:CHP.UN) who own billions, not millions, of real estate.
Plaza Retail REIT (TSX:PLZ.UN) has a market cap that’s barely 6% of RioCan’s. Clearly, they don’t fly in the same circles. RioCan’s getting out of the kind of retail real estate Plaza owns, opting for the warm confines of Canada’s largest cities.
I don’t disagree with RioCan CEO Ed Sonshine’s move to build mixed-use developments in urban settings where the residential rental components of these mixed-use projects will provide an increasingly bigger piece of RioCan’s future cash flow.
It makes good business sense. Owning a large amount of retail real estate in London, Ontario, and other smaller cities in the province don’t make sense for a company its size. Like Warren Buffett, RioCan is trying to bag elephants, not tiny rodents.
However, one person’s garbage is another person’s gold. Plaza Retail REIT makes a good return for shareholders by owning retail real estate unloved or unwanted by others.
With that in mind, here are three reasons to own this 6.5% yield.
Not headquartered in Toronto or Vancouver
Plaza is based in Fredericton, New Brunswick, not too far from where I live in Halifax. It’s fair to say that the town flies under the radar of most Canadian investors.
The company owns real estate in eight different provinces with 80% of the properties in Quebec and eastward to the Atlantic Ocean. New Brunswick, where it’s based, has 1.8 million square feet of leasable space accounting for 23% of its total portfolio. Nova Scotia accounts for another 1.2 million square feet including over 200,000 square feet of retail space just around the corner from my home at the Chain Lake Drive Plaza.
I shop there at least a couple of times a month, and while it might not be glamorous retail like Yorkdale Mall in Toronto, it serves its purpose just fine.
What I love about investing is that it gives you the opportunity to own things you normally wouldn’t. Someone in Toronto probably wouldn’t consider buying a retail property of their own in Atlantic Canada, but through Plaza, you can own a bunch of it.
Reformatting the retail landscape
Plaza specializes in taking poorly performing retail real estate and reformatting the footprint to make it more profitable. Currently, it has 26 development or redevelopment projects on the go involving 1.8 million square feet of retail real estate.
An example of what it does is currently on display in Belleville, Ontario, at the 1000 Islands Mall. Plaza paid $14 million for the 280,000 square foot indoor shopping center in January, has already found a 50% partner, and over the next two years will convert the former Sears store into five or six smaller shops while also making the mall itself an outdoor venue, thus saving operations costs.
At the end of the day, Plaza has grown to its current size by taking down on their luck retail properties and bringing them back to life. It’s a simple concept, but very difficult to do successfully.
A 10% total return
Over the past 15 years, Plaza has increased its annual dividend, on average, by 8.7%. Its yield’s been averaging between 4-6%. To achieve a 10% annual total return including capital appreciation, Plaza’s stock would have to grow to about $9 from $4.38, where it’s currently trading, to achieve a double-digit return.
With all the projects it has on the go, Plaza’s got a shot, but it really will have to hustle because its stock has never traded above $6.
If you’re a dividend investor, you ought to love Plaza, because not only does it have a juicy yield, but it also consistently grows its annual dividend payment, a winning formula if there ever was one.
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 Will Ashworth has no position in any stocks mentioned.