While the stock market has mostly recovered from the coronavirus crash of February and March 2020, the REIT (real estate investment trust) remains off considerably from its pre-pandemic highs, especially the hardest-hit ones operating in the real estate sub-industries that were the most impacted by the crisis.
Office and retail REITs have taken uppercuts to the chin, while residential REITs have taken less of a hit. Diversified mixed-use property plays with office and retail real property exposure are also still in the bargain bin. With the end of the COVID-19 pandemic now in sight, I think it makes a tonne of sense to go against the grain with some of the more bountiful high-yield REITs out there.
Deep value in the high-yield REITs
While I expect the pandemic will leave long-lasting demand damage, particularly for office REITs amid the work-from-home (WFH) shift, I’d argue that any modest reversion in mean demand for such real estate could have the potential to be a major needle mover for some of today’s heavily discounted REITs.
Undoubtedly, there’s still too much pessimism in the world of Canadian REITs, despite the vaccine progress. If you’re looking for a shot to lock in a high yield alongside a shot at sizeable gains in the post-COVID environment, now is a great time to act, while most other investors flock into the sexier and more resilient income stocks.
Without further ado, let’s have a look at two of my favourite high-yield Canadian REITs that look like great buys today.
SmartCentres REIT
SmartCentres REIT (TSX: SRU.UN) is my favourite opportunity in the high-yield REIT space today. The retail REIT is behind those popular Walmart-anchored strip malls known as Smart Centres. For a retail REIT, Smart has held its own amid the worst of the pandemic. That’s thanks in part to its tenant base, a large number of which were deemed as “essential retailers.”
With rent-collection rates near normal, the entire collapse in SmartCentres REIT, I believe, is completely unwarranted. The REIT kept its distribution (now at 6.6%) intact, and it’s well on its way to growing its AFFOs (adjusted funds from operations) once again.
On a longer-term basis, SmartCentres could be in for a re-valuation to the upside, as it diversifies beyond retail. Residential and retail is the future of SmartCentres, and if you don’t think brick-and-mortar is dead, Smart is a brilliant investment while it’s still down 28% from its all-time high.
H&R REIT
H&R REIT (TSX: HR.UN) is another former high-yield darling that’s been steadily climbing higher in recent weeks. The diversified REIT has considerable exposure to retail and office properties, both of which have taken a brunt of the damage amid the pandemic. If you’re willing to go against the grain, H&R offers an interesting value proposition for Canadian passive-income investors.
Shares sport a bountiful 4.7% yield that’s well supported by cash flows. It is worth noting that H&R’s FFO payout, which should be lower than 50% this year, is now on the conservative side. Should things return to normal, and management becomes more confident in the path moving forward, the REIT could hike its distribution by a considerable amount, perhaps reversing the reduction it suffered back in 2020.
The trend for FFOs is up, and I think H&R REIT will continue on its upward trajectory, as further evidence of a recovery is revealed.
