REITs (real estate investment trusts) have seen their shares get pummeled in recent weeks. As prices have fallen, yields have risen. Though higher rates are not good news for the real estate plays, most of the damage in REITs may have already been baked in here.
Undoubtedly, we saw evidence of peak inflation in the U.S. April’s CPI report. Though inflation isn’t rolling over rapidly, it has apparently peaked out at 8.5%. As inflation begins to wind down from here (look for May’s inflation to be even lower), the U.S. Federal Reserve may have wiggle room with the rate-hike plan. Perhaps they won’t need to hike as much as expected?
With the 10-year note yield falling below 3%, there’s a real chance that yields could continue to tumble, allowing equities and REITs some room for relief.
In this piece, we’ll have a look at two intriguing REITs in CT REIT (TSX: CRT.UN), which boasts a 5% yield, and H&R REIT (TSX: HR.UN), with its 4.3% yield. Both REITs have been turbulent of late, but may be worth picking up on the way down.
CT REIT
CT REIT gets around 90% of its sales from iconic Canadian retailer Canadian Tire. Indeed, I’ve touted CT REIT as a safe, income-savvier way to play the durability of Canadian Tire during the worst of 2020’s lockdowns. CT REIT shares have come such a long way since the dark days of early 2020. Despite the strength and resilience of its top tenant in Canadian Tire, investors are worried as to what a coming recession could entail.
Indeed, Canadian Tire is a discretionary retailer, but that doesn’t mean the firm will fall into financial distress in 18 months from now. The company has a rock-solid balance sheet, and CT REIT is unlikely to suffer any reduction in its distribution, even if central banks fail to engineer that soft landing that so many are hoping for.
The REIT is fresh off a nearly 10% decline, with a juicy 5% yield that’s more than worth reaching to amid the recent bout of market turbulence.
H&R REIT
For investors seeking a bit more upside, H&R REIT seems like an intriguing bet here. The diversified REIT, which has been punished for having more than its fair share of office exposure, has a long way to go if it’s to return to pre-pandemic levels. Shares are still off around 48% from five-year highs and down around 29% from 52-week highs. Moving forward, I expect H&R to continue diversifying away from retail and office, two sub-industries that have been clobbered during the COVID pandemic.
Though it will take time for the REIT to be seen in a positive light again, I think investors have a lot of incentive to stay patient with the rich 4.3% yield. The payout was cut during the worst of COVID lockdowns. Though the recovery trajectory could prove muted, I would not be surprised if H&R has a few distribution hikes up its sleeves at some point over the next five years.
