SmartCentres REIT: Can Its Dividend Strategy Weather Rising Rates?

SmartCentres Real Estate Investment Trust (SRU.UN) has long been a staple for income-seeking investors, offering a consistent monthly dividend of $0.1542 CAD since mid-2023. With a current yield of 7.24% and a track record of stable distributions, the question arises: How sustainable is this dividend amid rising interest rates, and what makes it attractive for income-focused portfolios? Let's dissect the numbers.

The Dividend Machine: Stability Amid Headwinds

SmartCentres' dividend strategy has been a model of consistency. Since 2024, the Trust has maintained its $0.1542 CAD monthly payout, translating to an annual dividend of $1.85 CAD per share. This equates to a yield of 7.24% as of July 2025, based on a share price of $25.54 CAD. The dividend has not been cut or reduced despite macroeconomic challenges, including elevated interest rates and construction cost pressures.

However, the payout ratio—a key metric for dividend sustainability—reached 112.81% in 2025. This means dividends slightly exceeded earnings, which raises questions about long-term viability. To assess this, we must examine the underlying financial health and growth drivers.

Financial Fortitude: NOI Growth and Occupancy Rates

SmartCentres' Net Operating Income (NOI) grew by 4.1% year-over-year in Q1 2025, excluding anchor tenants, to $143.5 million. This outperformance was fueled by strong tenant demand, with occupancy rates climbing to 98.4%—a near-record high. Notably, lease renewals achieved an 8.4% rent increase (excluding anchors), demonstrating pricing power in a competitive retail environment.

The Trust's mixed-use development pipeline further bolsters its cash flow. Projects such as the Vaughan NW Townhomes (90% pre-sold with a 21% profit margin) and self-storage facilities in Toronto and Montreal are on track to deliver high-margin revenue. These developments, valued at $11.9 billion, highlight a strategic shift toward residential and high-demand assets, which are less rate-sensitive than traditional retail spaces.

Interest Rate Exposure: Risks and Mitigation

SmartCentres' debt metrics paint a cautiously optimistic picture. Its weighted average interest rate dipped to 3.93% as of March 2025, down from 4.17% in early 2024. The debt-to-EBITDA ratio remains healthy at 9.6x, within its targeted range, and the interest coverage ratio holds steady at 2.5x—indicating sufficient cash flow to service debt.

However, rising rates pose a dual threat:
1. Refinancing Costs: The Trust's $25.6 million in cash provides a buffer, but maturing debt could face higher rates.
2. Anchor Tenant Risks: Over 30% of NOI comes from anchor tenants like Walmart. Their performance is critical, as seen in the recent opening of a 110,000 sq. ft. Walmart supercentre in South Oakville.

The weighted average term of debt (3.3 years) suggests some short-term refinancing needs, but the Trust's strong occupancy and development pipeline may help negotiate favorable terms.

The Case for Income Investors

For those seeking steady dividends, SmartCentres offers compelling advantages:
- High Yield: A 7.24% yield outperforms most Canadian REITs and fixed-income alternatives.
- Dividend Consistency: No cuts since 2023, despite a payout ratio over 100%, underscores management's confidence.
- Resilient NOI Growth: Retail and residential assets weathering economic cycles better than pure-play malls.

Key Risks and a Prudent Outlook

While the dividend appears sustainable for now, investors must remain vigilant:
1. Payout Ratio Sustainability: FFO growth must outpace dividend payouts to reduce reliance on non-core earnings (e.g., fair value adjustments).
2. Debt Management: Upcoming earnings (August 7, 2025) will clarify refinancing strategies and interest expense trends.
3. Construction Delays: Self-storage and condo projects (e.g., ArtWalk Tower A) must stay on track to deliver projected cash flows.

Investment Recommendation

Hold with a Watchlist Approach:
- Buy: Consider adding to positions if FFO growth accelerates and the August earnings report eases refinancing concerns.
- Hold: Maintain current holdings given the dividend's stability and occupancy resilience.
- Sell: If occupancy drops below 97%, or the payout ratio exceeds 120% without FFO improvements.

SmartCentres REIT remains a high-yield income play for those willing to tolerate moderate risk. Its dividend strategy, while aggressive on paper, is underpinned by robust NOI growth and a diversified asset base. Investors should monitor the August earnings closely to assess whether this dividend machine can continue its streak.

Final thought: In a low-yield world, 7.24% is hard to ignore—but always keep an eye on the fine print.