It’s a challenging year for retail real estate investment trusts (REITs), particularly those with great exposure to enclosed malls. To reduce the spread of the COVID-19 pandemic, the government has mandated temporary closures of many malls this year, thereby impacting rental income for REITs with mall exposure.
A defensive retail REIT for monthly income
Interestingly, one retail REIT has had very little impact from the COVID-19 disruptions so far. CT REIT (TSX:CRT.UN) collected 98.5% of its rents in July. Moreover, it experienced adjusted funds from operations (AFFO) per unit growth of 2.8% in Q2 against the same period in 2019.
CT REIT’s AFFO payout ratio in the first half of the year (H1) was 77.3%. Therefore, it had the room to increase its cash distribution by 2% this month. The new cash distribution boosts its yield to almost 5.8%. A dividend increase in the current environment is a big deal for a retail REIT!
The REIT’s portfolio consists of 92.1% of gross leasable area that’s occupied by Canadian Tire and its other banners. This part of the portfolio along with its four industrial properties are fully occupied, resulting in a very high portfolio occupancy rate of 99.3% at the end of Q2.
CT REIT is therefore a defensive stock for retirees to generate monthly income from. $10,000 invested in the REIT will generate passive income of about $580 a year.
At $13.87 per unit at writing, the retail REIT has upside potential of about 13% to get back to its normalized levels. So, over the next 12 months or so, total returns of close to 19% are possible.
A diversified REIT for monthly income and a turnaround
While turnaround investments have near-term challenges, they can also be very rewarding multi-year investments. H&R REIT (TSX:HR.UN) stock has been heavily punished due to its retail exposure.
The stock yields about 6.7% today, after falling more than 50% year to date and prudently cutting its cash distribution by 50% in May. This results in a lower FFO payout ratio that better protects its current dividend yield. Its Q2 payout ratio was 60.4% against Q2 2019’s 69%.
H&R REIT collected rents of 64%-69% from its retail portfolio between April and June. The rent collection improved to 77% in July and is expected to be 71% this month. So, it’s remaining solidly above 70%.
Rent collection for H&R REIT’s remaining portfolio (office, residential, and industrial assets) has been 90%-99% since April. Consequently, the total rent collection was 87%-89% between April and June, 91% in July and is expected to be about 87% this month.
H&R REIT is a riskier investment than CT REIT. The stock has fallen accordingly. Because of its near-term challenges, it offers greater income and total returns potential.
$10,000 invested in H&R REIT will generate annual passive income of approximately $670. At $10.28 per unit at writing, the diversified REIT can potentially double over the next two to three years.
The Foolish takeaway
Conservative retirees would probably choose CT REIT over H&R REIT, as the former stock’s cash flow generation has been more resilient during this pandemic.
However, those who decide to take on greater risk with a position in H&R REIT will be rewarded with 15% more in income and much greater upside potential. H&R REIT’s monthly dividend appears to be safe with a recent payout ratio in the 60% range.
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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 Kay Ng owns shares of H&R REAL ESTATE INV TRUST.