Generating monthly income like a landlord does not always mean owning rental properties. Not everyone has the cash outlay needed to become a landlord. Even if you can afford to become one, dealing with all the hassles that come with it can be a challenge for anyone. Getting monthly returns through a Real Estate Investment Trust (REIT) can be a much easier alternative.
When you earn income on investments held in a Tax-Free Savings Account (TFSA), it can grow your account balance without incurring taxes. Since withdrawals from a TFSA are also tax-free, the account can be an excellent tool to hold a portfolio of income-generating assets like dividend stocks and REITs.
Generating monthly returns can also make it easier to reinvest and compound returns until you can create a sizeable nest egg for retirement. Today, we will be looking at a high-yielding REIT that can be an excellent TFSA holding to generate tax-free monthly returns for years.
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SmartCentres REIT
SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is a $4.8 billion market-cap REIT that owns a growing portfolio of over 200 properties across the country. IT is one of Canada’s largest fully integrated REITs. Its portfolio mainly consists of shopping centres that are anchored by high-quality tenants, like retailers selling clothing, household goods, groceries, and other essentials. These are all items that Canadians will be buying regardless of the state of the economy.
When the renters operate essential businesses, it ensures higher occupancy and rental collection rates for REITs like SmartCentres. The trust generates rental income from its tenants. In turn, it pays part of the cash flow it generates to investors based on the number of units or shares they hold in the REIT.
As of this writing, SmartCentres REIT pays $0.15 per unit each month, which equals $1.85 per year and translates to a roughly 6.4% dividend yield at $28 per share. Boasting an occupancy rate of around 98%, its Adjusted Funds From Operations (AFFO) payout ratio was 90.6%.
Many of the properties owned by SmartCentres REIT are anchored by Walmart, which is an important reason for its success. Since Walmart provides essentials and is one of the biggest retailers in North America, it tends to attract more foot traffic to SmartCentres properties. As a result, its secondary tenants benefit from more customers, making it possible for the trust to maintain high occupancy and rent collection rates.
Recent years have seen SmartCentres diversify beyond traditional retail. It keeps growing its portfolio to include more residential properties, along with mixed-use developments and self-storage facilities.
Foolish takeaway
As of this writing, SmartCentres REIT trades for around $28 per share, and it trades at a discount from its all-time high valuation. While it might be considered undervalued, there are some caveats to owning SmartCentres REIT. The trust carries substantial debt, and any increase in interest rates can increase refinancing costs.
Higher borrowing costs mean pressure on its cash flows, leading to potential delays in development, weaker retail tenants, or a slowdown in growth due to a slowdown in housing. While it pays distributions regularly, the monthly payouts are not guaranteed. If you’re a TFSA investor with a diversified portfolio, SmartCentres REIT can be a good holding to boost your monthly passive income.
