Canadian dividend investors are set to lose a 7% high-yield monthly dividend stock next quarter, as TransAlta Renewables stock gets acquired by TransAlta Corporation. Finding a close or matching replacement could be challenging because fewer TSX dividend stocks pay monthly paychecks. Many reliable dividend stocks, including Pembina Pipeline, transitioned to quarterly payments, as this model is more cash flow friendly to them. That said, Canadian real estate investment trusts (REITs) are always uniquely up to the task and remain committed to monthly income distributions.
SmartCentres Real Estate Investment Trust (TSX:SRU.UN) pays a 15.4 cents per unit monthly distribution that yields 7.5% annually. The trust has paid reliable, uninterrupted monthly dividends (most properly titled distributions) since 2002. REITs can easily sustain monthly dividend payout frequencies because they essentially match their distributions to contractual monthly rental receipts. That said, should investors consider buying SmartCentres REIT’s units for the monthly distributions that yield 7.5%?
SmartCentres REIT: An enticing 7.5% yield for monthly income seekers
SmartCentres REIT is an integrated Canadian real estate property trust with 188 properties in community centres, comprising 34.8 million square feet of gross leasable area (GLA). It’s predominantly a Walmart-anchored retail property owner; however, the trust is fast diversifying into a mixed-use property giant by intensifying its “smart” community centres by expanding them into mixed-use residential, industrial, and self-storage properties.
The REIT has a reliable track record of paying monthly dividends reliably. Its retail property portfolio’s sustained high occupancy rates protected SmartCentres REIT’s monthly distributions during pandemic-related lockdowns, and the ongoing $16 billion intensification program may add 55.5 million square feet of GLA to its properties, increase foot traffic, and attract premium tenants to its locations.
The future could be brighter. However, SmartCentres’s units trade more than 14% lower over the past year, as the real estate market weakened under the weight of rising interest rates and affordability worries.
Encouragingly, the trust is closing on fully sold-out 1,026 condominiums since March 2023 — a source of liquidity and profits that should reflect positively in its second-quarter and third-quarter earnings reports. The REIT had more than three million square feet of construction activity during the second quarter. New developments should be accretive to its net asset values going forward.
That said, dividend yields above 7% usually compensate for elevated risk, and SmartCentres REIT has its fair share of them.
Why I’d still be happy to own SmartCentres REIT despite risks
Risks of distribution cuts shouldn’t be ignored, but such could be a far-away event for SmartCentres REIT.
The REIT’s payout ratios on its adjusted funds from operations (AFFO) have become stretched lately. SmartCentres REIT’s AFFO payout rate of 93% during the first quarter of 2023 was on the high side (but not unsustainably so). However, if we adjust for potentially “non-recurring” residential property sales, the payout rate balloons to 99.9%. The trust effectively paid out all its recurring distributable cash flows to investors during the first three months of 2023.
That said, considering that SmartCentres REIT’s core business is real estate and that the trust is executing a multi-year construction program, cash flows from residential property sales can essentially be considered recurring — at least for the duration of the current five-year intensification program. If condo sales prop up cash flows in the upcoming, I’d be happy with that.
Most noteworthy, the trust’s intensification program increases populations around its property locations, attracts more tenants, and, in turn, increases its bargaining power during rent negotiations.
During the first three months of 2023, SmartCentres REIT leased space to non-anchor retail tenants at average rates of $22.00 per square foot, or 26.3% above what it got a year ago. Management’s intensification strategy is working well for the business, and I’d be happy to receive a 7.5% yield while holding onto a potentially great long-term asset.
