REIT Investing: Which Ones Are Safe?

As the markets pummel REITs, REIT investing is changing. Find out which REIT might be a safe play today.

Jared Seguin

Published June 6, 2020 3:49 pm EDT

Recently, REITs have largely been pummelled along with the market. So, there’s a degree of uncertainty surrounding REIT investing at the moment.

The issue for income-hungry investors has become whether REIT yields can be trusted. At the end of the day, that comes down to the specific REIT in question.

Some REITs are in a far better position than others to continue paying dividends during these times. Specifically, ones with strong underlying financials stand a better chance.

Today, we’ll look at two TSX REITs and see which one is a safer option for REIT investing right now.

SmartCentres

Smart REIT (TSX: SRU.UN) is a large Canadian retail REIT with a market cap of $3.23B. It is a household name for those focused on REIT investing.

SmartCentres generally focuses on retail properties. The company operates various large shopping centres and in total owns 34.1 million square feet of rental property.

Of course, with many retail companies in precarious positions at the moment, this puts the collection of rent in peril for SmartCentres.

This is where a lot of the risk comes from for SmartCentres. For what it’s worth, the company has committed billions recently to furthering its portfolio of rental apartments and condos — but its bread and butter is still far and away retail property.

Now, due to a dip in share price, this REIT is yielding 8.28%. However, its payout ratio now exceeds 100%.

So, if the company isn’t able to cover the dividend with cash flow as is and it’s relying on retail shopping tenants for continued rental income? That sounds like a bad recipe.

While the yield might be enticing to investors, there are certainly question marks here that keep it from being one of the safer REIT picks.

REIT investing safety

Choice Properties REIT (TSX: CHP.UN) is another large Canadian REIT with a market cap of $4.11B. Its stability and reliability make it a staple of REIT investing.

While Choice is technically also a retail REIT, the nature of its holdings differ considerably from that of SmartCentres.

Choice’s retail properties are anchored by Canada’s leading grocer, Loblaw. The strategic relationship between Choice and Loblaw allows for Choice to have predictable and steady earnings.

As Loblaw continues to do solid business even through tough times, Choice can rely on rent collection.

As a result, Choice has seen less turbulence than other REITs in recent weeks. Plus, Choice’s payout ratio currently sits at 30%, whereas many of its peers are sitting at ratios exceeding 100%.

However, investors have to pay a premium for Choice’s stability and financial health. The REIT is yielding 5.57%, which pales in comparison to the 8.28% yield of SmartCentres.

But, Choice is in a position to be able to comfortably maintain that yield, whereas other REITs are likely looking at dividend cuts anyway.

When it comes to safety and reliability, Choice is a solid pick.