Many investors are worried about the state of the Canadian housing market. While there is a bit of froth, most investors would be doing themselves a great disservice by shunning the entire asset class.
While it may not be a good idea to purchase property in a bubble of a market like in Vancouver or Toronto, diversifying one’s portfolio with REITs remains a smart idea.
REITs aren’t just great for their generous income payouts; they’re also an alternative asset (an alternative to stocks) that further diversify a portfolio of investments. They exhibit a lower correlation to the broader markets and are a great supplement to any equity portfolio.
One top REIT investors may want to pick up on the dip is SmartCentres REIT (TSX:SRU.UN), a well-run retail REIT that’s looking to diversify away from strip malls and into mixed-use properties.
SmartCentres is looking to form master planned communities with a symbiosis between residential and retail tenants. Such a symbiosis increases the value of a property, allowing SmartCentres to command higher rents per square foot.
While the ambitious mixed-use developments have the potential to accelerate AFFOs and distributions over time, SmartCentres will remain a retail REIT predominantly for the time being.
That’s a massive turn-off to investors. What separates SmartCentres from the pack, however, is its close relationship with Wal-Mart Stores, which serve as a primary anchor for nearly 75% of Smart Centre locations.
While brick-and-mortar retail may be under pressure, housing one of the biggest competitors of Amazon.com and a definite advantage for SmartCentres REIT, which still isn’t feeling rapidly declining occupancy rates.
Moreover, Wal-Mart isn’t the only reason why SmartCentres is still upright after years of “onslaught” from digital retailers.
SmartCentre’s strong tenant base appears well equipped to thrive in spite of the rise of digital retail and the “decline” of shopping malls.
In many prior pieces, I touted SmartCentre’s tenant base, noting that it still makes sense, even for online shoppers to head to a Smart Centre for services that require one to be physically present.
Haircuts, car servicing at Canadian Tire, a quick bite to eat, groceries, window shopping, and the like are still reasons many Canadian consumers still make an effort to go to malls.
Moreover, SmartCentre’s Penguin Pickup, an online delivery pick-up location, allows the REIT to beckon consumers into its locations, effectively allowing other retail tenants to gain exposure to the most elusive of tech-savvy shoppers.
SmartCentres is a solid long-term bet.
In Canada, brick-and-mortar retail isn’t going anywhere, especially with its strong tenant base that includes Wal-Mart as a main attraction to a majority of its locations. Penguin Pickup goes to show that the digital and physical realms can, in fact, co-exist with one another.
At the time of writing, SmartCentres has a 5.7% yield. Although AFFOs likely won’t pop like many other growthy REITs out there, I do think there’s considerable value to be had at today’s levels as the retail REIT gravitates towards more compelling mixed-use properties.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.