Smart REIT (TSX:SRU.UN) is a well-run shopping centre REIT that offers investors a whopping 5.2% dividend yield. The company in anchored by Wal-Mart Stores, Inc. (NYSE:WMT), which is a huge driver of customers to Smart centres. The company currently owns over $8.6 billion worth of assets and over 140 shopping centres across Canada. The company has a huge presence in Ontario, which compromises 82% of the company’s square footage. Ontario’s economy is expected to see stable growth over the next few years.
There’s no question that brick-and-mortar retail stores like Wal-Mart are facing weakness thanks to the rise of e-commerce giants, but I still think shopping centre REITs like Smart will deliver stable growing operating results. It’s expected that the rise of e-commerce will continue to steal away customers from brick-and-mortar retail stores, but I don’t think it’s any reason to panic, since Wal-Mart is likely to be around for many years.
I believe e-commerce and traditional brick-and-mortar retail stores can coexist. Some people will always want to shop at a physical store instead of opting for online shopping, especially for grocery items, which you’d probably want to see in person before you buy.
A lower Canadian dollar will likely keep Canadians spending their money in Canada, so there’s reason to believe that shopping centres will see a steady increase in traffic over the medium term. The U.S. Federal Reserve is set to raise interest rates at a faster pace thanks to a strengthened U.S. economy under President Trump. This means the U.S. dollar will continue to get strong versus the Canadian dollar over the medium term, so you don’t have to worry about consumers taking a majority of their business south of the border. It wouldn’t make sense with such a weak Canadian dollar.
I think the sell-off due to the “death of the shopping mall” has presented an attractive opportunity for long-term income investors to get into Smart REIT. The company has a solid dividend which has remained intact, even during the Financial Crisis. The company trades at a forward 14.6 price-to-earnings multiple, a 1.3 price-to-book multiple, a 7.1 price-to-sales multiple, and a 16.2 price-to-cash flow multiple, all of which are in line with the company’s five-year historical average multiples of 14.9, 1.3, 6.7, and 17.3, respectively.
The company is not a steal by any means, but if you’re looking to give yourself a raise, then Smart REIT offers one of the best ways to beef up the yield of your portfolio without adding too much risk. If you’re bullish on Wal-Mart, then you may want to pick up shares of Smart REIT on any weakness as we head into the latter part of 2017.
