A 6.4% Dividend REIT Income Seekers Can’t Ignore

Choice Properties Real Estate Investment Trust (TSX:CHP.UN) faces near-term risks that are offset by its attractive dividend yield.

| More on:
invest your money

With over 751 properties with over 66 million square feet of leasable area, Choice Properties REIT (TSX:CHP.UN) is the largest commercial real estate investment trust (REIT) in the country. With a 6.4% dividend yield, it’s also one of the most attractive income stocks on the market.

While the market frets about a potential recession and the real estate sector takes a beating, it may be a great time to hunt for bargain dividends in this space. CHP is down nearly 12% over the past 12 months compared to a 11.1% drop for the S&P/TSX Composite Index.

However, CHP has vastly underperformed the iShares S&P/TSX Capped REIT Index ETF, which is flat over the same period. That underperformance is surprising for a number of reasons.

CHP offers investors a 43.92% payout ratio, which is one of the lowest in the industry. It has a recent funds from operations (FFO) payout ratio of about 71% and a sustainable adjusted FFO payout ratio of about 83%. This implies the dividend has room for growth.

The REIT’s former parent Loblaw is still a primary tenant, responsible for the portfolio’s 99% occupancy rate. The merger with Canadian REIT brought office, retail, and industrial assets to the combined portfolio. CHP is now one of the most stable and well-diversified REITs with a long track record of dividend growth.

However, the diversification doesn’t seem to be going far enough for CHP investors. Of the 751 properties, only 206 were acquired from Canadian Real Estate Investment Trust (CREIT). Nearly half of CREIT’s property portfolio is retail.

This means the majority of CHP holdings are leased by retail stores, and the trust’s earnings are overexposed to Loblaw. Grocery chain Loblaw hasn’t had a great year. The company’s earnings fell by 67.1% over the past 12 months, while the Canadian consumer retailing industry grew by 33.1% during the same period.

In my opinion, Loblaw’s struggles in the near term, combined with the general shift towards e-commerce, will have a sizable impact on CHP’s earnings over the medium term. The trust will need further acquisitions and renovations to make retail properties mixed-use to survive the seismic shifts in Canadian retail.

That’s where parent company George Weston comes in. The food processing and distribution conglomerate operates in a non-cyclical sector, which means its cash flow should remain stable regardless of the economy.

The company has nearly $1.8 billion in cash and cash equivalents on its books. Combined with the $84 million cash on CHP’s book, the REIT has more than enough firepower to buy commercial real estate in the next market correction.

Bottom line

Choice Properties is a well-managed REIT with an attractive dividend yield and a sizable portfolio. However, the portfolio is too concentrated in the supermarket retail sector, which exposes the underlying earnings to risk in the near term.

I believe parent company George Weston’s plan to diversify the portfolio further is matched by its financial strength. However, long-term investors should wait and watch the stock to see how this strategy pans out.  

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 Vishesh Raisinghani has no position in any of the stocks mentioned.

More on Dividend Stocks

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

person on phone leaning against outside wall with scenic view at airbnb rental property
Dividend Stocks

2 TSX Stocks Poised to Have a Big Summer

Restaurant Brands International (TSX:QSR) stock and another darling that could be too cheap to ignore this summer.

Read more »

HIGH VOLTAGE ELECRICITY TOWERS
Dividend Stocks

Forget Fortis Stock: Buy This Magnificent Utilities Stock Instead

Looking for high dividends and returns? Then I'm sorry, but Fortis (TSX:FTS) stock probably isn't for you.

Read more »

Increasing yield
Dividend Stocks

2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye on

Have these top TSX dividend stocks finally bottomed?

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks I’d Buy if They Fall a Bit

Any near-term decline in these two top Canadian dividend stocks will make them look even more attractive.

Read more »