Could This 8% Yielder Be the Most Undervalued REIT on the TSX?

SmartCentres REIT (TSX:SRU.UN) is a top 8%-yielding REIT that still looks too cheap to ignore, even in the face of further COVID-19 waves.

| More on:
Pixelated acronym REIT made from cubes, mosaic pattern

Image source: Getty Images

The TSX Index hasn’t looked back since recovering from the depths of the 2020 February-March stock market crash. While it seems like all the best bargains are gone, I’d urge investors to consider looking to areas of the market that remain a country mile away from their pre-pandemic, all-time highs.

Although we have a handful of safe and effective COVID-19 vaccines, with more likely on the way, we’re not out of the woods yet with this pandemic. The more contagious mutated variants of COVID-19 are a real threat. The Canadian vaccine rollout could also take longer than expected due to logistical challenges, and many people may be unwilling to have the vaccine administered once given a chance.

These profound uncertainties weigh most heavily on the industries decimated by the pandemic, most notably office and retail REITs, which remain a country mile away from their all-time highs, even after November’s vaccine-driven rally.

Don’t discount the pandemic risks

While it’s great to be hopeful and optimistic that the pandemic will end this year, it’s the job of an investor to consider the broader range of potential outcomes, including worst-case scenarios. That’s why I’m still an advocate of the barbell portfolio, which manages risks brought forth by COVID-19.

When it comes to the REITs, it certainly seems as though investors think this pandemic could drag on for longer than expected, even with vaccines rolling out across the nation. In case we are due to see this horrific pandemic drag into 2022, it’d be wise to pay careful attention to the financial health of some of the vulnerable, higher-yielding REITs to lower the odds of getting caught on the receiving end of a distribution cut.

SmartCentres REIT: A 8% yield that looks too good to pass up

Consider SmartCentres REIT (TSX:SRU.UN), a top REIT that I believe could be in a spot to skyrocket on the other side of this pandemic while being able to navigate through another several waves of COVID-19 lockdowns. The retail-focused REIT houses numerous essential retailers, most notably its anchor in Wal-Mart Stores, a brick-and-mortar darling that’s held its own through the worst of this crisis.

While Smart’s distribution could be under mild pressure again if worse comes to worst and the federal government imposes harsher lockdown measures, I don’t see a scenario where the REIT axes its bountiful distribution. The payout could become stretched again, but like during the worst of the first wave, I don’t suspect the distribution will be stretched towards its breaking point.

Moreover, I think many investors are discounting the REIT’s longer-term growth profile, which sees it expanding beyond retail real estate into mixed-use properties that I think could improve the quality of the REIT’s funds from operations (FFOs) on a longer-term basis. With brilliant managers striving to find the perfect blend of retail and residential property types, I view SmartCentres REIT as a bountiful income darling that could experience above-average distribution growth over time.

In the meantime, SmartCentres is very much a retail-focused REIT, and COVID-19 remains the biggest risk. Given Smart boasts an impressive lineup of high-quality tenants, many of which are pandemic resilient, I think SRU.UN remains the best retail REIT to make it through these uncertain times.

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.

More on Dividend Stocks

grow dividends
Dividend Stocks

1 Cheap Stock to Turn a $20,000 TFSA Into $267,000

If you're looking to boost your TFSA, you need a cheap stock that you can hold for decades. And I…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

2 of the Best Monthly Passive-Income Stocks to Buy in Canada Right Now

Here are two of the best Canadian monthly passive income stocks you can consider buying right now to hold for…

Read more »

stock analysis
Dividend Stocks

3 TSX Stocks I Will “Never” Sell

Few companies offer a powerful enough combination of dividends and growth potential to deserve a permanent place in your portfolio.

Read more »

value for money
Dividend Stocks

2 Cheap TSX Stocks for TFSA and RRSP Investors to Buy Now

These stocks look attractive today to buy for a TFSA or RRSP portfolio.

Read more »

Increasing yield
Dividend Stocks

3 TSX Stocks With High Dividend Yields

These three high-yielding dividend stocks would be excellent additions to your portfolio in this volatile environment.

Read more »

Payday ringed on a calendar
Dividend Stocks

New Investors: 3 Top TSX Dividend Stocks That Pay Cash Monthly

Canadian investors looking for monthly dividends have plenty of options on the TSX. Here's three of my favourite stocks for…

Read more »

woman data analyze
Dividend Stocks

These U.S. Stocks Are No-Brainer Additions to Your Portfolio

Buy these two no-brainer U.S. stocks if you want to gain exposure to international stocks in your self-directed portfolio.

Read more »

Value for money
Dividend Stocks

1 Value Stock Every Canadian Investor Should Own

This value stock not only has a solid present, but a stable future at incredibly cheap and even oversold prices!

Read more »