Retail real estate investment trusts (REITs) have dipped due to the changing retail landscape. As a result, the group is relatively cheap for current income.
Retail REITs collect rent from their portfolios of retail properties. The REITs distribute a big portion of their cash flow to their unitholders such that the unitholders can conveniently get juicy monthly income.
When it comes to retail REITs, RioCan will probably be the first to come to mind, as it’s the biggest in Canada. However, its smaller peers have also pulled back and offer bigger yields and likely higher growth.
Smart REIT (TSX:SRU.UN) is a Canadian retail REIT with interests 142 shopping centres, one office property, and one mixed-use property. As a Canadian retail REIT, Smart REIT has weaker headwinds than U.S. retail REITs, because in Canada there’s less retail space per capita, and it costs more to ship and deliver in Canada due to the smaller market.
Smart REIT’s tenants have an average lease term of about six years, while its largest tenant, Wal-Mart, has an average remaining lease term of more than seven years, with multiple renewal options of up to 80 years. Even when excluding Wal-Mart, the average remaining lease term is five years. So, the REIT’s rental income should remain stable for the next five years.
Smart REIT is investing outside the retail space in residential properties (apartment rentals, condominiums, and townhouses), senior residences, office, and self-storage properties.
It has 16 non-retail initiatives underway as well as 48 active and more than 54 future projects that are non-retail. It has 19 retail developments underway as well as 36 that are active, and more than two are planned for the future.
In the long term, investors can expect Smart REIT to continue to diversify its portfolio outside retail. Right now, at about $29.80 per unit, the REIT offers a safe 6.2% yield with a recent payout ratio of 85%. The company targets a long-term payout ratio of 77-82%.
Slate Retail REIT (TSX:SRT.UN) is more resilient against e-commerce as a pure-play U.S. grocery-anchored REIT. It has 83 retail assets with a Q2 grocery-anchored occupancy of 98.7% and a portfolio occupancy of nearly 91.7%, which was 3.3% lower than it was in Q2 2016.
That said, Slate Retail’s recent adjusted payout ratio is about 84%. So, its distribution should remain intact. At $7.45 per unit, the REIT offers a high yield of 7.5%.
Investor takeaway
Investors can consider Smart REIT or Slate Retail for above-average income after their pullbacks. Notably, the return-of-capital portion of their distributions is favourably taxed.
This portion reduces the adjusted cost basis and is essentially taxed as capital gains when you sell the units or when the adjusted cost basis turns negative.
Of course, you don’t have to worry about taxes if you hold the units in a tax-free or tax-deferred account.
