REITs: Relief Is on the Horizon as Rates Retreat

SmartCentres REIT (TSX:SRU.UN) is a great passive income pick to play a retreat in rates going into 2024.

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After the surprisingly cool U.S. CPI (Consumer Price Index) report, the inflation beast looks like it’s about to be slain. Further, talks of deflation have made their way into the headlines, thanks in part to a major misstep by a mega-cap retailer — yes, it’s none other than Walmart (NYSE:WMT) — south of the border.

Indeed, the case for “peak rates” now seems as strong as ever. And as central banks open the door to potential rate cuts at some point over the next 18 months, I do think the rate-sensitive firms that have sunk at the hands of rapid-fire rate hikes may be in a spot to sustain a potential march to much higher levels over the coming years.

Rate woes won’t last forever. That’s good news for the REITs!

Higher borrowing costs hurt some firms more than others. REITs (Real Estate Investment Trusts) have felt the pinch a lot harder than your average firm from the wave of interest rate increases. As rate-hike talks turn to rate-cut talks, and an inflationary environment becomes disinflationary or perhaps even deflationary (that’s negative inflation), the battered REITs may be the next asset class to knock a ball out of the park. And it’s about time they’ve been given some sort of relief, given their painful multi-year demise.

Of course, a weak economy does no favours to the REITs. And the effect of the COVID-19 pandemic is still weighing down on the office-centric REITs, as many workforces opt to stay remote or go with a hybrid model. I think it’s safe to say that office REITs may be feeling the pandemic overhang for many years to come. That said, for most other REITs, I do think it’s not too far-fetched to think that a return to new highs could be in the cards at some point over the next three to five years.

It’s easy to give up on the popular REITs. They only seem to move lower these days. As 2024 hits, though, I think it’s a mistake to count the top REITs out of the game, especially if rates are bound to move lower from here.

SmartCentres REIT: A retail REIT with a near-8% yield!

At this juncture, I’m a fan of high-quality REITs like SmartCentres REIT (TSX:SRU.UN). It’s a retail REIT that houses many Canadian Walmart locations. Undoubtedly, Walmart is a more defensive retailer with quite a substantial stake in the grocery game. This makes it slightly more defensive than rivals and could help maintain a good amount of foot traffic over at many SmartCentres locations.

Additionally, SmartCentres has a juicy 7.93% yield. And there are no plans to slash that distribution anytime soon. As the AFFO payout ratio looks to improve over time as the economy heals, I view SmartCentres REIT as one of the most intriguing contrarian picks in the entire REIT space. Sure, retail REITs aren’t the most sought-after. But at these depths, the risk/reward just looks way too good!

It’s also a great indirect way to play the power of Walmart stores here in Canada!

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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