If you’re looking for steady monthly income, perhaps a top-tier REIT (real estate investment trust) is worth looking into before the Bank of Canada has a chance to slash away at interest rates further.
Undoubtedly, the idea of a large 50-basis-point rate cut has been floated around. And though such a large cut may not be in the cards until there are further signs of economic decay, I think that the days of ultra-high yields of the REITs could be drawing to a close at some point over the next 12-18 months. Indeed, REIT yields have been quite swollen in recent years. Still, higher interest rates on risk-free securities and industry-specific headwinds have made the REITs less than appealing for defensive investors.
Despite their sizeable distribution yields, the REITs are risky assets, as many investors have found out in the last few years. In any case, I think the recent relief rally in the Canadian REIT scene is not only sustainable but just getting started, especially if central banks get a tad more aggressive with their rate cuts going into the final quarter of 2024.
At the end of the day, the pressured REITs are among the most intriguing of beneficiaries from a lower-rate environment.
In this piece, we’ll look at a stellar retail-focused REIT that boasts an annual distribution yield that is just shy of the 7% mark. Indeed, shares have been on a heck of a run, now up more than 25% in just under three months. Though I’m no fan of chasing momentum plays, valuations still seem modest, and with an improving technical backdrop, the REITs may be a timelier opportunity than you’d think in this falling-rate environment.
A smarter way to bet on the REIT scene
Without further ado, enter shares of SmartCentres REIT (TSX:SRU.UN), a retail REIT behind strip malls, many of which are anchored by Canadian Walmart stores. As you may know, Walmart has been firing on all cylinders in recent years. The retailer has been a fantastic place for consumers to save money amid the inflation-fuelled surge.
Additionally, with many Canadian grocers jacking up prices on everyday goods, it’s not hard to imagine many Canadians switching on over to Walmart for their weekly food hauls. Everyday low prices on a wide range of goods are exactly what you’ll come to expect from the local Walmart. The only issue with Walmart shares, though, is that they are getting expensive after rocketing over 75% in two years.
A better, cheaper, and more bountiful way to ride on the back of Walmart’s strengths (at least in Canada) lies in SmartCentres REIT. Of course, SmartCentres doesn’t lean entirely on the strength of Walmart. With numerous other big-box retail tenants, Smart stands out as a REIT that can keep its distribution intact through even the most turbulent of conditions.
SmartCentres REIT pays its annual distribution yield (6.83%) on a monthly basis. Of course, the annual yield used to be north of 8% when shares were closer to their multi-year depths. However, I think the yield remains attractive, especially for those investors looking to dollar cost average (buying incrementally over time and on dips) their way into a full position.
Bottom line
Let’s not forget that SmartCentres held its own (for the most part) through the worst of the COVID crisis and the ensuing inflation hailstorm. Even if a recession looms, I expect SmartCentres to keep on paying its generous distribution as the REIT looks to further diversify into residential real estate over the coming years.
With a potential double-bottom technical pattern that could be in the works, I’d look for SRU.UN shares to make a run for the $30 level in the coming weeks and months. Even if such a rally falters, I’d be more than willing to be a net buyer on weakness.
