Passive income has become increasingly important amid an uncertain economic backdrop marked by persistent inflation, geopolitical tensions, and layoffs driven by the broader adoption of artificial intelligence (AI). It can provide financial stability, help preserve purchasing power in a high-inflation environment, and create an additional source of income. Moreover, investors can reinvest these payouts to enhance their return potential and achieve their long-term financial goals.
Investing in dividend-paying stocks that distribute monthly cash payments is one of the most effective ways to build passive income. However, dividends are never guaranteed. Therefore, investors should focus on companies with established business models, reliable cash flows, and strong track records of consistent dividend payments.
Against this backdrop, let’s examine the business outlook, recent financial performance, growth prospects, and dividend yield of SmartCentres Real Estate Investment Trust (TSX: SRU.UN) to assess whether the stock presents an attractive buying opportunity.
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SmartCentres’ business outlook
SmartCentres owns and operates 200 strategically located properties across Canada, representing 35.5 million square feet of gross leasable area. The REIT’s portfolio has extensive reach, with approximately 90% of the Canadian population living within 10 kilometres of one of its properties. The REIT also boasts a high-quality tenant base, with 95% of its tenants having a regional or national presence and 60% operating in essential-service categories. Supported by its attractive locations and resilient tenant mix, SmartCentres has consistently maintained high occupancy levels across economic cycles.
During the first quarter, the REIT leased approximately 56,000 square feet of space amid healthy demand for retail properties. However, its occupancy rate eased to 97.6% from 98.4% in the prior year’s quarter. Meanwhile, same-property net operating income (NOI) increased 1.4% year over year, supported by strong tenant demand and healthy customer traffic. By the end of the quarter, SmartCentres had renewed 80% of the leases expiring this year at an average rental increase of 5.8%.
Supported by its resilient operating performance, SmartCentres grew its net operating income by 0.7% year over year to $137.7 million. However, higher expected credit loss provisions partially offset this growth. Meanwhile, adjusted funds from operations (FFO) per unit declined 3.7% to $0.54, primarily due to higher interest expenses and increased general and administrative costs.
Let’s now examine SmartCentres’s long-term growth prospects.
SmartCentres growth prospects
Supported by economic growth and limited new supply due to rising construction costs, demand for retail space has remained strong, benefiting SmartCentres. Against this favourable backdrop, the REIT continues to expand its portfolio. It is currently developing a 200,000-square-foot retail property that has been pre-sold to Canadian Tire and could open in the third quarter of this year. SmartCentres also acquired an 18.8-acre parcel of land in Kingston, Ontario, for approximately $7.1 million as part of its retail development growth strategy.
The REIT is also expanding its self-storage business, with management expecting facilities in Montreal and Laval to open this quarter. In addition, two more self-storage facilities in British Columbia could come online next year. Overall, SmartCentres currently has approximately 0.8 million square feet of properties under construction.
Looking further ahead, the REIT offers attractive long-term growth potential, supported by a development pipeline of approximately 87 million square feet across various stages of planning and development. Given these multiple growth drivers, SmartCentres appears well-positioned to deliver steady growth in the years ahead.
Investors’ takeaway
REITs are required to distribute a significant portion of their taxable income to unitholders, making them attractive investments for income-focused investors. Meanwhile, SmartCentres’ development pipeline, consistent lease renewals, ongoing leasing activity, and rising rental rates continue to support its financial performance and cash flows, enabling it to maintain attractive distributions.
The REIT currently pays a monthly distribution of $0.15 per unit, which translates into an attractive forward yield of 6.1%. In addition to these regular payouts, SmartCentres has delivered an impressive 17.8% capital gain so far this year.
Despite these strong returns and healthy growth prospects, the REIT trades at a reasonable valuation of 14.4 times analysts’ expected earnings over the next 12 months, making it an attractive option for investors seeking both income and capital appreciation.
