If your goal is to boost investment portfolio generated income in 2020, there aren’t too many relatively safe options to consider without taking on an elevated capital investment risk. However, a few TSX traded real estate investment trusts (REITs) remain significantly undervalued relative to peers, and I will discuss one that recently increased its monthly payout to yield 8.83% over the next year.
Consider Slate Retail REIT
Slate Retail REIT (TSX:SRT.UN) is a United States-focused grocery-anchored real estate operator with a US$1.3 billion asset portfolio located in top metro markets.
Since its cash flows are generated in United States dollars (USD), the trust pays its monthly distributions in USD with a current yield of a juicy 8.7% at current exchange rates.
The good news is that management announced a sixth consecutive annual increase to the distribution starting in December 2019. The monthly payout will increase by 1.1% to US$0.072 to boost the yield to 8.83% per annum for those that buy units at current prices.
Income yields this high are usually found on higher-risk tickers where the payout is likely unsustainable, but I think the priced risk on this high-quality trust’s units may be higher than warranted.
Slate’s distributions were well covered during the recent past quarter with an adjusted funds from operations payout rate of 84.4%, which was a significant improvement from an unsustainable 107% payout rate reported for the same quarter last year, and the metric has been significantly improving this year.
Further, the trust’s portfolio occupancy rate consistently rose from 93.3% in March to 94.4% by September this year, as management did well to sign on new tenants. A high tenant-retention rate of 94.7% for the third quarter is another great portfolio attribute that’s propping up occupancy, and improving occupancy rates generate higher cash flows to support the increasing distributions.
That’s not all, the portfolio’s gross debt-to-book value has significantly narrowed over the first nine months of this year from 61.5% in December last year to 59.7% by the end of the third quarter. Reducing leverage could allow the trust to free up some cash flows by saving on interest payments while opening some new capacity to take on new debt when lucrative acquisition opportunities present themselves.
Of course, there’s the near-term risk that the capital freed up from recent property sales may be slowly deployed, and valuation metrics may suffer in the short term, but units are already conservatively valued at book value, while the continued shortage of new supply of retail properties in Slate’s target locations continues to support a favourable leasing environment for the well-capitalized landlord.
Retail real estate continues to be an unloved segment due to a general negative sentiment that the old shopping mall is dying from competition from e-commerce, and new property supply is vanishing. This is presenting incumbent landlords with the opportunity to raise rents above market rates.
During the recent past quarter, Slate Retail REIT management leased out some space at a 15.1% premium to the average in-place rent on comparable space due to low competition, and I would safely expect the portfolio to continue posting positive same-property net operating income as it has done over the past 12 months.
And the distributions will continue coming every new month.
You may want to check out this income-generating machine.
