Canada’s annual inflation rate remained at 3% in August, unchanged from the previous month and at the upper end of the Bank of Canada’s target range. Higher oil prices, travel and tour costs, and food prices contributed to the persistent inflationary pressures. With geopolitical tensions and uncertainty continuing to weigh on the economic outlook, inflation could remain elevated in the months ahead. In such an environment, investors may benefit from building reliable passive-income streams that provide greater financial stability and help offset rising living costs.
One effective way to generate recurring passive income is through quality monthly-paying dividend stocks. However, dividends are not guaranteed and depend on a company’s financial performance, cash-generating ability, and capital-allocation decisions. Therefore, investors should focus on established businesses with resilient operations, reliable cash flows, and sustainable payout profiles.
Against this backdrop, SmartCentres Real Estate Investment Trust (TSX: SRU.UN) stands out as an attractive option for income-seeking investors, given its stable cash flows and high dividend yield. Holding eligible investments in a Tax-Free Savings Account (TFSA) could further improve tax efficiency, as eligible investors can earn dividend income and capital gains tax-free, subject to TFSA rules and contribution limits. Let’s take a closer look at SmartCentres REIT and its investment prospects.
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SmartCentres’s business outlook
SmartCentres REIT operates 201 strategically located properties across Canada, encompassing approximately 35.5 million square feet of gross leasable area. Its well-established tenant base provides significant stability, with 95% of tenants having a national or regional presence and more than 80% offering essential services. This resilient tenant mix supports healthy occupancy and rent collection rates, helping the REIT maintain relatively stable cash flows across varying economic conditions.
The REIT delivered encouraging operational results in the recently reported second quarter. It leased 247,000 square feet of previously vacant space and renewed 86% of leases expiring this year, achieving an impressive 12% rental growth on renewals. As a result, its occupancy rate improved by 0.5 percentage points quarter over quarter to 98.1%. Same-property net operating income (NOI) also increased 2.6%, supported by lease-up activity and higher rental rates.
Despite these operational improvements, SmartCentres reported a net and comprehensive loss of $147 million, compared with income of $109.2 million in the year-ago quarter. The decline was primarily attributable to a $196.2 million fair-value loss on investment properties, a non-cash accounting adjustment that does not directly affect the REIT’s underlying cash flows. Adjusted FFO per share declined modestly to $0.54 from $0.55, as higher interest and general and administrative expenses more than offset the benefit of higher net rental income.
Overall, SmartCentres’s underlying operating performance remains resilient, supported by improving occupancy, strong lease renewals, and healthy rental-rate growth. With its high-quality tenant base and stable portfolio, the REIT appears well positioned to capitalize on future growth opportunities. Let’s examine its growth prospects.
SmartCentres’s growth prospects
Demand for Canadian retail space has remained resilient, while limited new supply amid elevated construction costs has created a favourable environment for established REITs such as SmartCentres. The REIT is capitalizing on this backdrop by expanding its development pipeline. It is currently developing a 200,000-square-foot Canadian Tire store, which the company expects to hand over in the fourth quarter of this year. It is also advancing self-storage projects in Burnaby and Victoria, following the successful opening of facilities in Montreal and Laval. Overall, approximately 0.8 million square feet of retail, self-storage, mixed-use, commercial, office, and industrial properties are currently under construction.
SmartCentres also has significant opportunities to drive long-term growth. The REIT recently acquired a 17-acre land parcel in Winnipeg, Manitoba, for $10.1 million as part of its ongoing retail development program. Furthermore, approximately 87 million square feet of properties are in various stages of planning and development, providing substantial visibility into its future expansion.
With a resilient occupancy rate, strong rental growth, a diversified development pipeline, and a sizeable portfolio of future projects, SmartCentres appears well positioned to capitalize on favourable market conditions and generate sustainable growth in cash flows and shareholder value over the long term.
Investors’ takeaway
Supported by its resilient occupancy levels and recurring cash flows, SmartCentres currently pays a monthly distribution of $0.15 per unit, representing an attractive forward yield of 7%. The REIT also trades at a relatively reasonable valuation, with its next-12-month price-to-earnings multiple standing at 18.5. Given its attractive yield, stable underlying business, and reasonable valuation, SmartCentres appears to be an appealing opportunity for income-seeking investors at current levels.
