Plaza Retail REIT's Steady Distribution Stream: A Compelling Case for Defensive Income Investing in Retail REITs

In an era where high interest rates have rattled equity markets and pressured income-focused investors, Plaza Retail REIT (PLZ.UN) stands out as a rare beacon of stability. With a trailing twelve-month dividend yield of 6.68%—well above the Canadian retail REIT average—this company has carved a niche for itself by delivering consistent payouts even as broader economic headwinds persist. But is this yield sustainable? Let's dissect the numbers, strategies, and risks to determine whether Plaza's distribution stream is a defensive gem or a precarious gamble.

A Track Record of Resilience

Plaza Retail REIT has maintained a near-annual dividend of $0.20 CAD (adjusted for splits) from 2021 to 2024, showcasing a rare level of consistency in the volatile retail sector. While 2025 saw a 41.67% reduction to $0.12 CAD (stock split adjusted), this dip was an anomaly rather than a trend. The company's historical dividend coverage metrics remain robust: a 75.6% payout ratio relative to earnings and a 73.2% cash payout ratio. These figures suggest that Plaza's distribution is well-supported by its operating cash flows, even in a high-rate environment.

The key to Plaza's reliability lies in its focus on grocery-anchored and unanchored strip centers. These properties, which cater to essential retail needs, have shown remarkable resilience during economic downturns. For instance, the company's recent conversion of 30,000 square feet at the Village Shopping Center in Newfoundland to a No Frills store is expected to unlock $1 million in incremental NOI. Such strategic repositioning not only stabilizes cash flows but also enhances tenant diversity, reducing exposure to e-commerce-driven retail shifts.

Navigating High-Rate Challenges

High interest rates typically strain REITs by increasing borrowing costs and reducing property valuations. Yet, Plaza has mitigated these risks through disciplined capital management. Its debt-to-equity ratio of 113.2%—down from 147.4% five years ago—reflects a gradual deleveraging effort. While this level of leverage remains elevated, the company's 2x interest coverage ratio (based on $67.2 million in EBIT) indicates it can service its debt without immediate distress.

The real test for Plaza—and any REIT—is its ability to grow its payout. In Q2 2025, the company reported a 3.8% year-over-year increase in NOI to $19.1 million, driven by higher rents and occupancy rates of 98%. These metrics are critical for sustaining dividends, especially as the company's AFFO payout ratio hit 130.3% in Q4 2024. While this suggests the dividend is funded by more than just current cash flows, the inclusion of non-recurring costs (like greenfield write-offs) paints a more nuanced picture. Excluding these, AFFO per unit would have risen 6% year-over-year, hinting at underlying strength.

Strategic Moves for Long-Term Stability

Plaza's leadership has embraced a three-pronged strategy: optimize, intensify, and consolidate. Recent acquisitions, such as the full ownership of three Ontario Shoppers Drug Mart properties, have boosted control over high-traffic assets. Meanwhile, intensification projects—like converting underutilized spaces into grocery stores—add value without the need for costly new developments. These initiatives are particularly smart in a high-rate environment, where capital efficiency is paramount.

The company's forward-looking approach also includes positioning for potential Federal Reserve rate cuts in 2026. As interest rates ease, Plaza's grocery-anchored properties are likely to see renewed investor demand, further bolstering its NOI and dividend capacity.

Risks and Realities

No investment is without risk. Plaza's high debt load and recent dividend cut in 2025 raise valid concerns. A 2x interest coverage ratio leaves little room for error, and a sharp drop in NOI could force further reductions. Additionally, the company's reliance on non-recurring gains (e.g., fair value adjustments on properties) to boost profits means its financials may not reflect true operational performance.

However, these risks must be weighed against the broader context. Plaza's 6.67% forward yield is a compelling draw for income investors, especially as bond yields remain elevated. The company's strategic focus on essential retail formats and its improving debt profile suggest it is better positioned than many peers to weather the current cycle.

The Verdict: A Defensive Play with Caveats

For income investors seeking stability, Plaza Retail REIT offers a compelling case. Its high yield, strong coverage ratios, and strategic repositioning of assets make it a standout in the retail REIT space. While the recent dividend cut and leverage concerns warrant caution, the company's proactive approach to optimizing its portfolio and its alignment with resilient retail formats provide a solid foundation for long-term income.

Investment Takeaway: Consider adding Plaza to a diversified income portfolio, but do so with a long-term horizon and a clear understanding of the risks. Monitor its Q3 2025 earnings for updates on debt management and occupancy trends. In a world where certainty is scarce, Plaza's steady distribution stream may just be the defensive anchor you're looking for.