Updated on October 2nd, 2024 by Felix Martinez
SmartCentres Real Estate Investment Trust (CWYUF) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.Related: List of publicly traded REITs
#2: It is a high-yield stock based on its 6.9% dividend yield.Related: List of 5%+ yielding stocks
#3: It pays dividends monthly instead of quarterly.Related: List of monthly dividend stocks
There are currently just 78 monthly dividend stocks. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter, like dividend yield and payout ratio) by clicking on the link below:
SmartCentres Real Estate Investment Trust’s trifecta of favorable tax status as a REIT, a high dividend yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about SmartCentres Real Estate Investment Trust.
Business Overview
SmartCentres Real Estate Investment Trust is one of the largest fully integrated REITs in Canada. Its best-in-class portfolio consists of 195 strategically located properties in every province across the country. SmartCentres REIT has $7.7 Billion in assets and owns 35.2 million square feet of income-producing, value-oriented retail space with 98.2% occupancy on owned land across Canada.
Source: Investor Presentation
SmartCentres REIT faces a secular headwind, namely the shift of consumers from traditional shopping to online purchases. This trend has remarkably accelerated since the onset of the coronavirus crisis. Many retail REITs have been hurt by this secular shift.
However, SmartCentres REIT enjoys a key competitive advantage, namely the strong financial position of its tenants. The REIT generates more than 25% of its revenues from Walmart and more than 60% of its revenues from financially strong tenants, which offer essential services. This is a major competitive advantage, as it renders the cash flows of the REIT reliable and renders the REIT resilient to economic downturns.
The company reported strong financial and operational results for the second quarter of 2024, ending June 30. CEO Mitchell Goldhar highlighted the positive momentum in leasing demand, with occupancy rising to 98.2% and over 272,000 square feet of previously vacant space leased. Rent growth, excluding anchor tenants, reached 8.5%, and the Millway rental project in Vaughan Metropolitan Centre (VMC) continued its strong leasing pace, achieving 88% occupancy by the quarter’s end. Additionally, SmartCentres completed projects in Markham and Vaughan and raised $350 million through a debenture issuance to manage debt efficiently.
Operationally, the Trust saw a 2.2% increase in net operating income (NOI) for the same properties (excluding anchors) and leased 272,000 square feet of space, pushing occupancy rates to 98.2%. A significant portion of space set to mature in 2024 was renewed or extended, reflecting a rent growth of 8.5%. On the development front, SmartCentres continues to expand with a pipeline of 57.5 million square feet of mixed-use development projects. Notable developments include the near completion of the Millway rental project and the construction of retail units on Laird Drive and townhomes in Vaughan.
From a financial standpoint, net rental income increased by $3.3 million or 2.6% for the quarter. However, funds from operations (FFO) per unit dropped to $0.50 from $0.55 in the same quarter last year, due to higher interest rates and reduced condo closings. Net income per unit also decreased to $0.71, mainly due to fluctuations in interest rate swaps and increased interest expenses. The Trust expanded its credit facility from $500 million to $750 million, extending its maturity to 2029, and issued $350 million in senior unsecured debentures to refinance existing debt.
Growth Prospects
SmartCentres REIT can boast of having a defensive business model thanks to the high credit profile of its tenants. On the other hand, the REIT has failed to grow its FFO per unit over the last decade, as its bottom line has remained essentially flat over this period.
It is important to note that the lackluster performance record has resulted primarily from the strengthening of the USD vs. CAD. As the Canadian dollar has depreciated by about 30% over the last decade, it is obvious that SmartCentres REIT has grown its FFO per unit by about 2.7% per year on average in its local currency over the last decade.
Source: Investor Presentation
More precisely, SmartCentres REIT has 179 initiatives related to recurring income and 95 initiatives related to the intensification of existing properties. Therefore, the REIT’s future looks brighter than the past decade.
On the other hand, central banks are raising interest rates aggressively to cool the economy and thus restore inflation to its normal range. Higher interest rates are likely to significantly increase the interest expense of SmartCentres REIT, an important headwind to consider going forward.
Given the promising growth prospects of SmartCentres REIT but also its lackluster performance record, its currency risk and the headwind from high interest rates, we expect the REIT to grow its FFO per unit by about 2.0% per year on average over the next five years.
Source: Investor Presentation
Dividend & Valuation Analysis
SmartCentres REIT is currently offering an above-average dividend yield of 6.9%. It is thus an interesting candidate for income-oriented investors but the latter should be aware that the dividend may fluctuate significantly over time due to the gyrations of the exchange rates between the Canadian dollar and the USD.
Moreover, the REIT has an elevated payout ratio of nearly 100%, which greatly reduces the dividend’s margin of safety. On the bright side, thanks to its defensive business model and strong interest coverage ratio of 4.7, the trust is not likely to cut its dividend in the absence of a severe recession. Nevertheless, investors should not expect meaningful dividend growth going forward and should be aware that the dividend may be cut in the event of an unforeseen downturn, such as a deep recession. We also note that SmartCentres REIT has a material debt load on its balance sheet.
In reference to the valuation, SmartCentres REIT is currently trading for 14.3 times its FFO per unit in the last 12 months. Given the material debt load of the REIT, we assume a fair price-to-FFO ratio of 12.0 for the stock. Therefore, the current FFO multiple is higher than our assumed fair price-to-FFO ratio. If the stock trades at its fair valuation level in five years, it will incur a -2.7% annualized drag in its returns.
Taking into account the 2% annual FFO-per-unit growth, the 6.9% dividend, and a -2.7% annualized contraction of valuation level, SmartCentres REIT could offer a 6.5% average annual total return over the next five years. This is a decent expected return, though we recommend waiting for a better entry point in order to enhance the margin of safety as well as the expected return. Moreover, the stock is suitable only for investors who are comfortable with the risk that comes from the high payout ratio and the material debt load of the trust.
Final Thoughts
SmartCentres REIT can generate most of its revenues from companies with rock-solid balance sheets. It thus enjoys much more reliable revenues than most REITs. This is an important competitive advantage, especially during economic downturns.
Despite its high payout ratio, the stock offers an exceptionally high dividend yield of 6.9%, making it an attractive candidate for income-oriented investors’ portfolios.
On the other hand, investors should be aware of the risk that results from the somewhat weak balance sheet of the REIT. If high inflation persists for much longer than currently anticipated, high-interest rates will greatly burden the REIT. Therefore, only the investors who are confident that inflation will soon revert to normal levels should consider purchasing this stock.
Moreover, SmartCentres REIT is characterized by extremely low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.