High yields come with high risk. But you can mitigate the risk if you know what you are doing. While the stock market works in unexpected ways, the business environment is slightly understandable. When you invest in a stock knowing what to expect from the company, you can plan a course of action. If the reason you are bullish on the business is strong, a dip is an opportunity to buy. If the business becomes unattractive, a dip is a trap and better be avoided.
Two high-yield stocks
Slate Asset Management is a global alternative investment platform. The company manages two real estate investment trusts (REITs), but one is a buy and one is a sell.
- Slate Grocery REIT (TSX: SGR.UN)
- Slate Office REIT (TSX:SOT.UN)
One high-yield stock to buy
Slate Grocery REIT (TSX: SGR.UN) is worth buying because of its strong rental operations and favourable economics. It has 117 properties as of 2023, with an occupancy rate of 94.4%. Its strategy is to own grocery-anchored properties in major markets of the United States. The demand environment is favourable for the REIT as grocery-anchored stores enjoy 100% occupancy, and there are not many retail properties in America because of a slowdown in new development.
The REIT has good economics as 68.7% are essential tenants, and 94% of its properties are grocery-anchored and enjoy high occupancy in any economic condition. It makes the REIT resilient to an economic crisis.
Every business has some key performance indicators (KPIs) that show the performance of business operations. A REIT’s KPIs are its occupancy ratio and funds from operations payout ratio, which is 80.1% for the grocery REIT. Its debt is 52% of the gross book value of its properties, which means it could pay off its debt by selling 52% of its property portfolio. Even this ratio is within the prescribed limit of 60%.
All this hints that Slate Grocery REIT has smooth operations and a tenant portfolio. It could continue to earn rent even in a difficult economy and pay 80% of its rental income as distributions. Moreover, the REIT has been paying stable distributions in eight out of the last 10 years. Looking at the company from a 360-degree view gives you confidence that it can maintain its regular monthly distributions. Thus, the REIT’s stock price makes it an attractive buy to lock in a high yield of 10.69%.
One stock to avoid
Slate Asset Management has another REIT, Slate Office REIT. The pandemic changed the economics of the office REIT. The work-from-home trend that began with COVID-19 and continued later as hybrid work encouraged companies to optimize their office usage. Moreover, a weak economy encouraged companies to cut costs by reducing office space and reducing demand for Slate Office REIT.
Moreover, the real estate market price correction and a 5% interest rate made the business environment challenging for Slate Office REIT. Its rental income took a hit, and high interest expenses inflated the first-quarter net loss to $22.57 million from $4.07 million a year ago.
The management cut distributions in April 2023 and then paused the payments in November 2023. The need of the hour is survival. Hence, Slate Office REIT launched a Portfolio Realignment Plan to reduce debt, increase liquidity and improve its portfolio composition. It even allowed the REIT to increase its debt above 65% of its gross book value, which means high debt could keep its profits low for a long time.
As part of the plan, it has sold two properties and has another 12.3% of its gross leasable area up for sale. It will use the proceeds to reduce debt. While interest rate cuts and economic growth could help the REIT turnaround, it is better to avoid buying it even though the stock trades at an 87% discount. The Slate Office REIT might show a yield of over 18%. But that is just how the calculation works—annual distribution as a percentage of the stock price.
By November 2024, the annual distribution will be zero if the REIT does not resume distribution payments. The first-quarter funds from operations of $0.04 per unit indicate that distribution could remain paused for a long time.
