The coronavirus pandemic has been hard on real estate investment trusts (REITs). Rent collection rates have been fluctuating, and in the face of a second wave of coronavirus cases (and potential lockdowns), the REIT investors appear panicked, with much of the fear focused on the retail, office, and residential real estate sub-industries.
While distributions could be pressured to their breaking point over the coming months, I think passive-income investors have a lot to gain by scooping up shares of those unloved REITs while they’re down and out.
Many of them are trading at discounts in excess of 50% to last year’s highs. And while distribution yields may not be safe if we’re due for another year worth of coronavirus waves and intermittent shutdowns, I think that long-term income seekers should still look to put money to work, as I believe distributions could be re-hiked abruptly once we move into a post-pandemic world.
Deep value in the REIT space
In a post-COVID world, I suspect the demand for even the hardest-hit properties will see some reversion to their mean. And such a modest reversion, I believe, will be enough to move the needle on shares of battered REITs that have likely overshot to the downside in recent months.
I prefer residential and retail REITs over the office REITs, given the rise of the pandemic-induced work-from-home (WFH) shift that I think will outlast this pandemic because of the incredible new technologies in place that allow for home-based work environments with minimal losses in productivity.
My top REIT picks at this juncture would have to be SmartCentres REIT (TSX:SRU.UN) and Canadian Apartment Properties REIT, which sport yields of 8.8% and 3.2%, respectively, at the time of writing.
The former play is a contrarian retail real estate bet that’s severely discounted, and the latter is an out-of-favour high-growth residential REIT. Both names, I believe, have safe payouts that are likely to survive another wave of coronavirus cases, as well as shares that I think have bottomed out. This piece will focus on the former retail REIT, as I think it’s a far more attractive pick for income-oriented investors.
A smart contrarian play for income investors
SmartCentres REIT took a big hit to the chin amid the pandemic, despite demonstrating relatively resilient rent-collection numbers. The REIT houses some high-quality tenants, many of which are deemed as essential businesses that will continue operating in the event of future lockdowns.
Not only is Smart a smart way to collect a relatively safe distribution amid the pandemic, but it’s also a great play on a post-COVID world that could bring forth major upside. Moreover, Smart has a long-term plan to diversify its business into mixed-use properties, which could drive greater AFFO (adjusted funds from operations) growth over the next decade and beyond. If you seek a nearly 9% yield but don’t want to risk your shirt, I’d say SRU.UN is a buy while it’s at $21.
It’s a misunderstood REIT that many investors are overly fearful of. Sure, Smart is a mall REIT, but it’s a best-in-breed mall REIT that’s capable of outshining many less-than-stellar non-retail REITs.
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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 Joey Frenette owns shares of Smart REIT. The Motley Fool recommends Smart REIT.