It’s important to understand that high yield and sustainability are correlated but not to the extent many investors think. A high yield doesn’t always mean that the payouts are unsustainable; similarly, dividends at a modest or even low yield might be unsustainable.
It’s essential to look at the relevant sustainability metrics. One such metric for real estate investment trusts, or REITs, is the adjusted funds from operations (AFFO) payout ratio.
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A retail and industrial REIT
Choice Properties REIT (TSX: CHP.UN) is one of the most prominent REITs in Canada, with a massive portfolio totalling 19.2 million square feet. The bulk of it is in retail properties and industrial properties. There are over 700 properties in the REIT’s portfolio, and over half the portfolio (over 57%) is anchored by the grocery giant Loblaw since both it and the REIT are owned by one holding company.
The REIT is currently heavily discounted and offers a modestly high yield of 5.6%. It used to grow its dividends but suspended the practice and didn’t suspend or slash its dividends during the pandemic, despite owning the most vulnerable asset class (retail), which endorses its dividend sustainability potential. The financials further augment this notion as the stock boasts an AFFO payout ratio of 82.9%.
A fully integrated REIT
SmartCentres REIT (TSX: SRU.UN) claims to be one of the biggest fully integrated REITs in the country, which means that they handle everything from development to managing the completed property and handling tenants.
It has a portfolio of 195 properties covering a massive area of about 35.3 million square feet. Its tenant portfolio is impressive, but the most significant tenant is Walmart, which is responsible for 23% of the REIT’s revenue.
The REIT boasts a very healthy occupancy level — 98.5% (both in-place and committed). It’s also offering dividends at a generous 7.4% yield. The AFFO payout ratio reached a dangerous level last year (close to 100%), making its dividends quite insecure for most investors.
However, the REIT has made quite a turnaround in this regard and is currently offering dividends at an AFFO payout ratio of 75.2%, making its dividends highly sustainable.
A workspace REIT
Allied Properties REIT (TSX: AP.UN) is one of the largest REITs in Canada by market capitalization and owns a sizable portfolio of 188 workspace properties in key locations across the country. The bulk of the portfolio is in three regions: Montreal, Toronto, and Ottawa. The occupancy rates differ across different regions but are relatively healthy in general.
From a dividend perspective, Allied Properties is the most generous of the three REITs. It’s offering dividends at a yield of about 10%. However, the stock hasn’t raised its base dividends for two years, a practice it had continued for several years before.
Its AFFO payout ratio is dangerously high for the last quarter — 96% but marginally safer for the nine-month period (91%). This indicates that the dividends might be affordable now but barely, and any significant financial distress might tip the balance.
Foolish takeaway
The dividends of two REITs seem quite sustainable, and the third one has a strong track record, which inspires confidence that the REIT might be able to sustain its dividends till its financials and relevant ratios are healthy again. Thanks to an industry-wide bear market phase, the REITs are discounted, so you can lock in a solid yield if you buy now.
