There’s no better way to get instant access to a diverse portfolio of Canadian real estate than loading up on some of our finest real estate investment trusts (REITs).
REIT investors tend to fall into two groups. Some are only interested in owning the best of the best, content to collect a sub-par yield. They sleep well at night knowing they own the best assets. And then there are the yield chasers, investors who want a more generous bang for their buck.
You must be careful chasing yield, since a higher payout is typically more dangerous. But that doesn’t mean it’s unsustainable. Here are a couple of nice REITs that offer +8% dividends — payouts that look to be safe.
Slate Retail REIT (TSX:SRT.UN) owns grocery-anchored retail real estate in secondary U.S. cities. The portfolio includes 83 different properties spanning more than 10 million square feet of gross leasable area.
There are a few reasons why I like this particular REIT today. Let’s start with the management, who are dedicated value investors who insist on getting a bargain whenever a property is purchased. This is the whole reason why the trust focuses on smaller cities — there are better deals to be had in these locations because fewer buyers are looking.
The focus on properties with a grocery store is also a good idea. The internet isn’t about to disrupt grocery shopping anytime soon. These stores attract lots of foot traffic, which is great for other retailers looking for a new location. This leads to a solid occupancy rate; Slate’s portfolio is currently 93.3% full.
Some investors might be worried about the sustainability of the 8.6% yield, but they shouldn’t be. The company estimates it’ll have a 70% payout ratio in 2019, which places it right around average for the sector.
The distribution is also paid in U.S. dollars, which offers a nice bit of diversification for Canadian investors.
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Morguard REIT (TSX:MRT.UN) is the owner of 49 different office, industrial, and retail properties, with locations in B.C., Alberta, Saskatchewan, Manitoba, Ontario, and Quebec. Together, the portfolio spans a little more than 10 million square feet of gross leasable area.
Morguard has been one of Canada’s cheapest REITs for a while now, at least on a price-to-book value perspective. The current share price is $11.60 per unit, while the company’s book value is $25.75 per unit. That translates into a 55% discount compared to the actual value of the assets, which has to be appealing to value investors.
One reason for the massive difference between book value and market value is investors don’t like Morguard’s portfolio mix. 29% of earnings come from Alberta, primarily from a mixture of office buildings in Calgary’s downtown and a number of malls in smaller cities. Investors aren’t particularly keen on these assets today.
Occupancy also keeps creeping down, with current occupancy at a still robust 93%. But occupancy was over 94% just a year ago. Investors don’t like to see that number trending downwards.
The good news is the trust’s 8.1% dividend is sustainable. Over the first six months of 2019, Morguard earned $0.76 per share in funds from operations. It paid out $0.48 per share in distributions. That gives us a payout ratio of just 63%, which is solid.
The bottom line
Both Morguard REIT and Slate Retail REIT offer Canadian real estate investors an opportunity to collect a generous yield while waiting for the underlying assets to recover in value. It really is that simple.
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 Nelson Smith owns shares of MORGUARD UN.