The pandemic-induced woes in the retail sub-sector of the real estate industry seems to be over. Real estate investment trusts (REITs) like RioCan (TSX:REI.UN) and SmartCentres (TSX:SRU.UN) should be desirable investments, as their retail leasing activities gain traction and vacancy rates decline.
Based on the survey results by CBRE, the national vacancy rate declined in Q2 and Q3 2021. The commercial real estate company also said the rate has tapered to 4.1% this year. Arlin Markowitz, CBRE’s executive vice-president and head of the Toronto urban retail team, added that prospective lessees feel confident signing longer contracts, not short-term leases anymore.
RioCan and SmartCentres are also excellent dividend plays for income investors owing to their generous dividends. The former yields an attractive 4.58%, and the latter offers a fantastic 6.38%. Now is a good time to pick up the REITs while they trade at discounted prices.
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Changing consumer landscape
RioCan’s CEO, Jonathan Gitlin, said, “There’s been a fairly ugly period brought on by COVID, where there was a lot of uncertainty surrounding where physical retail fits within the consumer landscape, and even before COVID because of e-commerce. Now, I can comfortably say we’re in a position where physical retail has established itself and there’s far less ambiguity.”
This $6.81 billion REIT is more retail-focused, although the mixed-use properties in its portfolio are growing. The locations of RioCan’s 204 active properties are in Canada’s prime, high-density transit-oriented areas. In Q1 2022, net income increased 49.9% to $160.1 million versus Q1 2021.
Notably, RioCan’s committed occupancy during the quarter increased 120 basis points year over year to 97%. As of March 31, 2022, the rent collection rate is high of 99.1%, which was in line with pre-pandemic levels. Its SVP for leasing and tenant construction, Jeff Ross, said the pipeline for new tenants also remains strong.
Gitlin added, “There has been significant recognition by a lot of our tenants that they need the brick-and-mortar elements to make their whole infrastructure work. We are seeing more tension in the negotiation process that favors the commercial landlord and certainly, RioCan.” This real estate currently trades at $21.99 per share (-2.43% year to date).
Strong pillar
At $28.84 per share, SmartCentres investors are down 8.16% year to date. However, the generous dividend payout should compensate for the underperformance. In Q1 2022, the $4.9 billion REIT saw a vastly improved retail leasing momentum and growth across its portfolio.
SmartCentres survived the fallout from the pandemic because of a strong pillar. Walmart-anchored shopping centres provide strength and stability its retail portfolio. In Q1 2022, net income and comprehensive net income increased 511% to $370.11 million versus Q1 2021. Cash flows from operating activities grew 29% year over year to $102.81 million.
Management said, “We ended the first quarter with solid performances from all aspects of the business. Operational resilience was demonstrated by solid leasing momentum for both existing and new retail tenants.” At the quarter’s end, the in-place and committed occupancy rates were 97.0% and 97.2%, respectively.
SmartCentres boast a large development pipeline (underway, active, and future) that includes residential rental properties and senior housing.
Renewed confidence
Because of the renewed confidence in brick-and-mortar retail, the stage is set for the big recovery of RioCan and SmartCentres. Expect their commercial leases to surge significantly.
