Real estate investment trusts (REITs) have been on the downtrend of late, thanks to rising interest rates, which seem to be showing few signs of slowing down. Indeed, the Bank of Canada may not just be keeping the door open for higher rates; it may be inclined to keep rates elevated for an extended period of time. Indeed, the “higher-rate-for-longer” type of climate does not bode too well for the REITs.
However, as the economy grinds to a halt, perhaps opening the door for a contraction at some point over the next year, rates may be on the backtrack sooner than expected. Such an unforeseen round of rate hikes could cause some investors to hit the panic button with the fear of a hard landing for the economy.
Indeed, even billionaire activist investor Bill Ackman thinks there’s “too much risk in the world” to stick with his bet against U.S. Treasuries. He’s right. There’s a lot that could drag economic growth and inflation in the process. In such a scenario, the bond market may be able to climb higher as yields begin to move down.
It’s either a good economy and high rates or a weak economy and the prospect of lower rates. At this juncture, the latter may be the lesser of the two poisons, especially if the economy isn’t in for that dreaded hard landing. Indeed, REITs would prosper as rates retreat, but a waning economy could bring forth a new set of pressures. Either way, the following two REITs are worth watching as they continue to move through today’s brutal high-rate world.
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SmartCentres REIT
SmartCentres REIT (TSX: SRU.UN) has been in free fall since peaking out in the middle of 2021. Shares are going for under $22 per share, with an 8.4% yield. Indeed, shares are pretty much where they were for a large part of 2020. I don’t think that’s right, especially considering how resilient Smart’s tenant base is. Indeed, Walmart, its top tenant, is doing relatively well in today’s environment. And it’s likely to keep drawing in traffic at local Walmart-anchored SmartCentres.
Of course, rates could weigh on the firm as it builds its portfolio. For now, though, I view SmartCentres as a deep-value play that could really benefit from lower rates. The sooner we get a recession over with, the better the prospects will be for Smart and the rest of the retail REIT scene.
Canadian Apartment Properties REIT
Up next, we have Canadian Apartment Properties REIT (TSX: CAR.UN), which is battered right now, down around 33% from its all-time high. Unlike SmartCentres, CAPREIT is a “growthy” residential REIT. You won’t get a huge yield from the name. At writing, shares yield 3.5%. However, I think shares are poised to do incredibly well on the other side of a downturn.
With plenty of rental properties in Vancouver and Toronto (two of the hottest rental markets in the world), CAPREIT is one of the long-term plays you can just stash in your portfolio and forget you own for decades at a time. CAPREIT may not be the cheapest REIT in the world. But it’s not all too expensive for what you get!
