A monthly property payment has an appealing rhythm. Rent comes in, income goes out, and your account gets a little busier 12 times a year. Borrowing costs can interrupt that rhythm long before a building empties. I’d judge a landlord’s yield by what remains after its bills, rather than give the payment schedule credit for making the investment safer. So let’s look at one to consider on the TSX today.
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The rate squeeze takes time
A real estate investment trust (REIT) owns income-producing property and distributes part of its earnings. Rising interest rates don’t reprice every loan overnight, but debt renewals can gradually increase costs. Property values can also fall when buyers demand a larger return, even while tenants continue paying rent.
Choice Properties (TSX: CHP.UN) owns commercial real estate, including grocery-anchored retail, industrial properties, and development opportunities. Its connection to essential shopping helps support recurring rent. Loblaw is a major tenant, so that stability also comes with customer concentration.
The attraction for an income investor is receiving property cash without directly owning and maintaining a building. They are responsible for checking that the trust has enough left after financing and recurring property spending. A reliable grocery tenant can’t negotiate every interest bill away.
Into earnings
Choice’s second-quarter funds-from-operations (FFO) payout was 73.2%. FFO removes certain accounting effects from profit, including property valuation movements. That number can look comfortable, but it doesn’t deduct every expense needed to keep the real estate earning.
Adjusted funds from operations (AFFO) allows for additional property and leasing costs. On that measure, the payout was 89.9%. For Choice, this leaves considerably less room to absorb higher borrowing costs or additional maintenance before the payment becomes harder to support.
This difference is why I’d avoid describing the distribution as exceptionally well covered using the friendlier measure alone. Costs can vary by quarter, so I’d also look at the broader period. The direction I want is more cash retained after ordinary property needs, rather than a larger distribution just to attract buyers.
Earning income
The monthly payment is $0.065 per unit, or $0.78 annualized. At the recent close of $15.26, the indicated yield is about 5.1%. Here’s a $20,000 budget, with whole units rounded down and fees excluded.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| CHP.UN | $15.26 | 1,310 | $0.78 | $1,021.80 | Monthly | $19,990.60 |
That purchase leaves $9.40 in cash and produces $85.15 monthly if the rate continues. It’s an actual monthly payment, with eligibility depending on the relevant record date.
For someone wanting $100 monthly, the calculation is $100 divided by $0.065, rounded up. That requires 1,539 units, costing $23,485.14 at the reference price. It would generate about $100.04 monthly. The larger investment is the price of that extra covered bill.
Considerations
Choice can increase earnings through lease renewals, completed development, and acquisitions. Those opportunities need to improve what each unit earns after financing. Adding properties with new debt or units can make the trust larger without making each investor proportionately better off.
I’d wait for stronger coverage before substantially increasing an existing position. Today’s yield offers compensation for accepting property and financing risk, but the latest adjusted payout leaves me wanting more breathing room. I’d be comfortable with a modest holding alongside other income sources.
Holding inside a Tax-Free Savings Account (TFSA) generally shelters Canadian tax on distributions and withdrawals, provided there’s sufficient room. Outside registered accounts, REIT distributions can have different tax components, so I’d avoid treating the payment exactly like an eligible Canadian corporate dividend.
A portfolio of Canadian income investments also needs businesses outside commercial property. A cash reserve can handle spending needs without forcing a unit sale after a rate-driven decline.
Bottom line
I’d hold Choice modestly for income and wait for a more comfortable cash cushion before adding aggressively. Future rent growth and completed projects could strengthen the monthly payment’s foundation. That improvement would make the yield more appealing than another month arriving on schedule.
