It’s been quite a while since the slate of dividend and distribution plays were this yield-heavy! Passive income investors with a bit of extra dry powder on the sidelines may wish to navigate Canada’s REITs (Real Estate Investment Trusts) if they seek a top-notch passive income power play for the core of their long-term income streams.
Indeed, chasing yield comes with its own share of risks. However, such risks can be mitigated with some careful research. By striving to maximize one’s margin of safety (the difference between the lower price you stand to pay and its true value), one can make a mistake and not feel the full force of a sell-off.
As the Bank of Canada looks to reduce interest rates, perhaps at a rate faster than the U.S. Federal Reserve (or the Fed, for short), we could see the rate-sensitive firms start moving more wildly. Undoubtedly, capital-intensive firms and REITs could certainly use lower rates. The lower the costs of borrowing, the more cash can be sent right back into the pockets of investors.
Personally, I view the REIT space as overlooked and full of potential for passive income seekers looking to score a reasonable rate of return over the next four to five years. Indeed, the Bank of Canada rate cuts could come a heck of a lot sooner (perhaps a few cuts dealt in a few months), but a long-term mindset is still required if you want to maximize your risk/reward with the following REIT plays.
So, without further ado, consider shares of H&R REIT (TSX: HR.UN) and SmartCentres REIT (TSX: SRU.UN), two dirt-cheap REITs that seem overdue for an upside rally at some point down the line.
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H&R REIT
H&R REIT, a diversified REIT that’s been selling off assets, has been through the wringer in recent years. The distribution was reduced to a more sustainable level, but after the latest plunge (shares seem to be approaching multi-year lows once again), the yield is starting to get a bit swollen again at 6.67%.
Indeed, the payout still seems sustainable. Although shares have been a huge laggard for those who stuck with the name. Though I have no idea where the bottom will be, I would look to the low-to-mid $8 range as a technical floor of support.
H&R REIT may look severely undervalued (can you believe shares go for well below one times price-to-book?), but until Mr. Market appreciates the REIT for what it is, it could take a few years before shares march higher in a sustained fashion.
Personally, I view H&R as more of a capital appreciation play than a passive income play, given the potential upside that could be in the cards as the REIT does its best to turn a corner. At 0.45 times price-to-book, you’re getting some interesting real estate assets for a rock-bottom price, in my humble opinion.
SmartCentres REIT
For passive income investors seeking more yield, SmartCentres REIT is an intriguing name to look to if you’re looking for retail exposure. Undoubtedly, retail REITs may not be the most exciting property plays out there right now. But if you seek income and low multiples, I’d argue the space is ripe with magnificent buying opportunities.
At $22 and change, SRU.UN shares yield 8.1%. That’s a big deal and though the payout is getting stretched, I do think it will survive the onslaught. Thanks to Penguin Pickup and various other new-age offerings, Smart is playing it smart when it comes to finding a way to resonate with shoppers.
At the end of the day, SmartCentres REIT has the legendary Walmart (NYSE:WMT) (it’s a major anchor at most Smart-owned strip malls) it can lean on through good times and bad. Given Walmart’s lower grocery prices (especially versus many Canadian-owned grocers!), it’s a retail knight built to help many Canadian consumers dodge and weave past inflation’s heavy blow. As long as Smart has Walmart standing in its corner, I don’t expect its distribution to be knocked down!
