The TSX market is nirvana for dividend seekers as several dividend stocks trade at a discount. Real estate and mortgage stocks nose-dived as high interest rates not only increased their interest expense but also slowed their revenue growth. Most Canadians postponed home buying till mortgages became more affordable, REITs delayed their development plans, and companies rented smaller places and moved to a hybrid work culture. But land is one asset whose value appreciates in a strong economy.
A dividend stock down 27%
The overall weakness in the real estate market pulled down property prices. Real Estate Investment Trusts (REIT) own and develop properties and lease them to tenants. Their unit price depends on the fair market value of the properties they hold after deducting debt.
Slate Grocery REIT (TSX: SGR.UN) holds 116 retail properties in the United States metro areas with a gross book value of US$2.3 billion. On that, it has taken a debt of $1.2 billion. After deducting all debt, the net asset value of its portfolio stands at US$13.98 per unit as of June 30, 2024. In Canadian dollars, this value comes to $19, but the REIT is trading at a 36% discount at $12.17 at the time of writing this article.
It’s a value stock, as you get a higher asset value at a lower price. And if you are worried about the falling fair market value of the property, the REIT has shown a slowdown in those numbers. And the $1-2 million dip in property value is only because of changes in valuation parameters, cash flows, and accounting adjustments.
Despite the strong fundamentals, the REIT’s unit price has fallen 27% since April 2022 as rising interest rates by the US Fed increased its interest expenses and reduced the property valuation. The July jobs data has mounted recessionary fears, hinting that Fed rate cuts are likely in the coming months. The REIT has finished bottoming out and is trading below its asset value. The only direction it can go is up as interest rates ease and the economy recovers.
Why is this dividend stock a buy right now?
Property prices increase in a strong economy or when demand is greater than supply. In the United States, the new supply of retail properties has been the lowest over the past five years, owing to high construction costs and elevated interest rates. And demand has been high, with retailers like Walmart planning to open more stores. This demand-supply gap has helped retail property prices recover faster than commercial properties, where supply exceeds demand due to a hybrid work culture.
The net asset value of Slate Grocery REIT could increase as property prices rise, hinting at capital appreciation in the medium term.
Moreover, the REIT has been paying 80% of its funds from operations as distributions, which gives it the flexibility to sustain the monthly distribution of US$0.072 per unit. Since the REIT is trading at a discount, you can get access to this payout at a lower price. It means you can lock in an annual yield of 9.7% for a long time.
Dividend yield = annual dividend per unit/unit price
Slate Grocery REIT = $1.18 / $12.17
If you invest $5,000 in Slate Grocery REIT now, you can buy 410 units, each paying a dividend of $1.18 a year. You can get an annual payout of $483.80, a yield of 9.7% on the invested amount.
If the REIT’s unit price appreciates to its NAV of $19, your $5,000 could become $7,790 (410 units x $19). If you want to sell the units when they appreciate, you will have to forego the payout but you will collect a lump sum amount.
The takeaway
Looking at the possible returns, this dividend stock is a buy for all types of investors, the ones seeking passive income, those seeking growth, beginners as well as retirees. However, it is a limited period opportunity as the REIT unit price has already begun its ascension, surging 24% from its October 2023 low, just before the Fed paused the interest rate hike. Thus, Slate is the dividend stock to buy right now.
