Top 2 Under-the-Radar REITs to Buy in 2023

Consider SmartCentres REIT (TSX:SRU.UN) and another passive-income portfolio mainstay while they’re in the doghouse.

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Market turbulence has been working its way across the Canadian REIT (real estate investment trust) space over the past year. With U.S. banks causing the latest wave of jitters, long-term, passive-income investors may have the chance to get above-average yields at multiples below that of historic averages.

Indeed, REITs are not immune to the headwinds brought forth by economic recessions. That said, many well-run REITs are more than well positioned to get back on their feet again. If anything, the 2020 recession and lockdowns were the ultimate stress test for the REITs.

Shares of many REITs have still yet to recover from the 2020 crash. With so much risk already baked into many REITs that continue to bring in near-normal levels of adjusted funds from operations (AFFOs), there’s a good chance that the excess pessimism surrounding the REITs is overdone, opening up a window of opportunity for contrarians to get more for every dollar.

It’s not easy to be a REIT industry when the tides turn. REITs may have less correlation to the broader TSX Index, on average. However, when there are a lot of macro worries, REITs can be just as turbulent a ride as your average stock. Heck, REITs can be a choppier ride than most defensive stocks with comparable yields!

Still, the best-run REITs will continue to pay investors distributions, as they look to dodge and weave past recessionary and inflationary headwinds.

In this piece, we’ll check out two top REITs that I think are worthy bets for the year.

SmartCentres REIT

SmartCentres REIT (TSX:SRU.UN) is my favourite Canadian retail REIT at today’s valuations. Like most other REITs, shares of the strip-mall-focused retail REIT are down 22% from their 2022 highs and around 26% from their pre-pandemic all-time high.

Undoubtedly, the past year has been unkind to the Walmart-anchored retail REIT, despite the resilience of most of its tenant base. The occupancy rate was hovering around 98% for most of 2022, which is incredibly sound. This year, I expect the occupancy rate to be in a similar range.

Though a recession could weigh heavily on demand for discretionary goods, I simply do not see very many Smart tenants finding themselves unable to make a month’s rent. Further, Smart’s top tenant (Walmart) can actually move forward in a recession year. When times get tough, more people tend to shop at the retail giant for better deals. This should help Smart continue delivering for investors. With a 7.25% yield, I view Smart as a very smart contrarian investment for passive-income seekers.

H&R REIT

H&R REIT (TSX:HR.UN) is still down a country mile away from its pre-pandemic high. In recent quarters, shares have fallen further away from these highs, which are starting to look a tad out of reach. With shares down just north of 54% from peak levels, H&R REIT is a deep-value play in the REIT space. Now, there is baggage. The REIT has sold off quite a few assets in recent years. Despite the sales, H&R remains quite heavy in office and retail properties, which have yet to fully recover from 2020 lockdowns.

The REIT found itself in the wrong place at the wrong time. Its distribution was slashed, and many long-time investors likely parted ways with the former real estate behemoth. Though the yield is modest at 4.98%, I view the value to be had in the name as the biggest draw for investors. It’s one of the cheapest mid-cap ($3.5 billion) REITs out there. Though it’ll take a while for shares to hit recent highs, I like the risk/reward scenario for the next 10 years.

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 has positions in SmartCentres Real Estate Investment Trust. The Motley Fool recommends SmartCentres Real Estate Investment Trust and Walmart. The Motley Fool has a disclosure policy.

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