The Canadian real estate investment trusts (REITs) have been weighed down in recent years, thanks in part to the bite of higher interest rates. Despite lagging share prices, I do view opportunity in the Canadian REIT scene by those passive income investors drawn in by the above-average yields. Indeed, distribution yields on your average REIT are skewed on the high side. But with the first rate cut, likely among many to come from the Bank of Canada, I’d argue that the worst days for Canada’s big REITs may very well be coming to an end.
Of course, some individual names have idiosyncratic issues they’ll need to iron out before their shares can get back into rally mode. Regardless, those seeking deep value, yield, and a bit more diversification for their portfolios may find it worthwhile to consider Canadian REITs at this point in the market cycle.
Sure, rates are only starting to feel the pull of gravity. But questions linger as to how much longer we’ll need to wait before the next cut. Indeed, the new trajectory of rates may not be enough if we’re destined to stay in this higher-rate environment for a few years longer. Indeed, call it the “higher-for-longer” type of environment, if you will. With the U.S. Federal Reserve on pause for now, the Bank of Canada may be more open to considering holding off on its next cut as we inch into year’s end.
Either way, the REITs are incredibly rate-sensitive, but if you’re willing to ride out the volatility for the yield, I do think the following two names are worth snatching this summer. Here are two intriguing REITs with distributions (or dividends) that I view as sustainable and well-covered enough to make it out of these multi-year headwinds.
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H&R REIT
H&R REIT (TSX: HR.UN) has already been through the worst of the storm, with shares now down more than 62% from their all-time highs on the back of rate-related woes and the COVID issues that kicked shares into a massive rut.
A few years later, H&R REIT has still yet to gain meaningful ground from its 2020 lows. In any case, I view the underperformance as more of an opportunity for investors to be patient enough to wait for H&R’s turnaround plan to come to fruition.
Indeed, H&R has sold off quite a few properties. And though the commercial REIT had already reduced its distribution in the past, I view the current one as far better-covered. On a great day for the TSX Index on Monday, HR.UN shares rose more than 3%, marking one of the best up days in a while. I think more days like this are to come as REITs get a break for a change.
SmartCentres REIT
SmartCentres REIT (TSX: SRU.UN) is a retail REIT that has also been weighed down for many years now but has begun to show signs of life, with shares surging 2.7% on Monday’s session alone. Though one big up day doesn’t mark the start of a turnaround, I do view the retail-focused REIT as a bargain that’s hiding in plain sight, especially once Canadian consumers are put in a better spot.
The 8.6% yield is about as impressive as they come and though the payout is quite a hefty commitment, I do view the distribution as relatively safe. It survived the COVID onslaught, and it’s holding up decently amid the inflationary surge. All considered, SRU.UN shares are one of the more intriguing high-yielders in the REIT scene right now.
