Passive-income plays can be magnificent dip-buys during times of market-wide turmoil. With a recession or mild economic slowdown on the horizon, investors must be careful that they don’t chase yield without evaluating the durability of a firm’s operating cash flow stream.
In the REIT (real estate investment trust) space, plenty of shares are in bear market territory (down 20% from peak levels). Amid their plunges, their yields have grown by a considerable amount. Though economic headwinds do not bode well for distribution stability of your average REIT, there are certain high-yield REITs that are babies thrown out with the bathwater.
Indeed, the REIT space has not been spared from the latest market correction. Higher yields may not be all they seem if the odds of a distribution cut are high. For many REITs that don’t face a substantial drawdown in adjusted funds from operations (AFFOs) in an economic downturn, their distributions should be considered safe. And swollen yields may be an extra incentive to get in while uncertainties are high.
In this piece, we’ll check out two intriguing REITs that I think are oversold with yields that are the most attractive they’ve been since the early days of the 2020 stock market crash.
SmartCentres REIT
SmartCentres REIT (TSX:SRU.UN) is a retail REIT with over 170 Walmart-anchored locations across Canada. Undoubtedly, the Walmart anchor helped SmartCentres sail through the COVID crisis without slashing its distribution.
With a recession on the horizon, SmartCentres is, once again, under considerable pressure. The stock plunged 21% from peak to trough before recovering to $28 and change per share — down around 15% from its high. The drawdown in shares seems unwarranted, given the recession-resilience Walmart (and many other Smart tenants). As prices surge, and consumers become stressed, more folks will shop at Walmart to make every dollar go as far as possible. For Smart, that means strong traffic, even as the economic tides turn against it.
Smart has very stable cash flows and an intriguing development pipeline that will, in time, diversify the firm’s asset base into residential real estate. In prior pieces, I’d noted that such diversification initiatives would help drive multiple expansion. Investors just hate retail these days. But Smart is a cut above in the industry.
At writing, shares of SRU.UN trade at a nearly 10% discount to book value. With a 4.6 times earnings multiple and a rich (and likely secure) 6.51% yield, I view Smart as a market bargain for passive-income investors.
CT REIT
CT REIT (TSX:CRT.UN) is a Canadian Tire-anchored real estate play that also looks positioned to weather an economic hail storm. Shares are down around 12% from their all-time highs of around $18 per share. Recession jitters have worked their way into shares. However, I think many are discounting the resilience of the firm’s Canadian Tire anchor. The firm operates around 360 retail locations across the country, with a small number of industrial and mixed-use properties.
The 5.33%-yielding distribution is bountiful and likely to hold up, as the economy grinds to a slowdown. At 24.1 times trailing earnings, CRT.UN may not be the cheapest REIT. But you’ve got to pay up for quality exposure. And it’s hard to top the quality of a REIT anchored by one of the most iconic retailers in the country.
