Some investors are attracted by high yields. However, they should be careful about dividend cuts, which tend to be more common among high yielders than lower yielders.
There are a few real estate investment trusts (REITs) that offer high yields of up to 10%. Are they safe, though?
Cominar REIT (TSX:CUF.UN) is the third-largest diversified REIT in Canada with a strong focus in Quebec. It earns about three-quarters of its net operating income (NOI) from the province.
The REIT also has properties in Ontario, western Canada, and Atlantic Canada. As of March, Cominar’s portfolio consisted of 530 office, retail, and industrial and mixed-use properties.
Cominar units have declined nearly 15% in the last 12 months and almost 40% in the last five years. The depressed units now offer a very attractive yield of 10%.
But can Cominar maintain its distribution?
Well, it’s in Cominar’s culture to stick to its distribution. Since 2001, the REIT has at least maintained its distribution through thick and thin, including in the last two recessions.
Arguably, the company is in a worse shape than it was coming out of the last recession. Back then, Cominar generated funds from operations (FFO) per unit of $1.77. Last year, it only generated FFO per unit of $1.62.
As the company has sold off a number of properties, its cash flow generation has declined, and its distribution looks more in danger. That said, management has finished with selling its properties for now and used some of the sale proceeds to reduce its debt and thereby saving interest costs. The REIT’s distribution reinvestment program will also provide some cushion (as a temporary measure) to reduce its payout ratio, which comes out to just under 95%.
On the other hand, Cominar’s adjusted FFO payout ratio is about 113%, which indicates its distribution is not sustainable over the long term unless it starts improving its FFO per unit.
American Hotel Income Properties REIT LP’s (TSX:HOT.UN) 8.1% yield seems safer looking at its payout ratio. However, it’s in an entirely different business from Cominar.
American Hotel, as the name implies, consists of a portfolio of hotel properties in the U.S. Specifically, as of March, it owned 95 hotels with a total of 9,383 rooms across 80 cities in 30 states.
The company’s branded portfolio has 49 hotels with 5,497 rooms. These include well-known brands such as Marriott, Holiday Inn, and Hilton.
Its rail portfolio consists of 46 Oak Tree Inns with 3,886 rooms. American Hotel has about three-quarters of its room revenue in this portfolio guaranteed via long-term contracts with big rail companies. The contracts last from two to 10 years.
Last year, American Hotel’s adjusted FFO payout ratio was under 84%. It has been on a decline since 2013 as management has steadily increased its FFO per unit. This implies its distribution is becoming safer.
Please note that American Hotel pays a U.S. dollar-denominated distribution. So, its yield will fluctuate with the strength of the U.S. dollar against the Canadian dollar.
As well, the company earns U.S.-sourced dividends which are subject to U.S. withholding tax. So, it’s probably best for interested investors to consider investing its units in an RRSP. When in doubt, confirm with your financial institution or a qualified financial advisor.
Investor takeaway
Although Cominar offers a bigger yield than American Hotel, the latter offers a safer distribution with a lower payout ratio. That said, there are ways for companies to maintain their distributions even when their payout ratios are over 100%. So, don’t count out Cominar just yet. However, I wouldn’t bet the farm on the company.
