Real Estate Split Corp.'s CAD 0.13 Dividend: A High-Yield Play in a Rising Rate World?

Real Estate Split Corp. (TSE:RS) has once again drawn the attention of income-focused investors with its latest distribution of CAD 0.13 per Class A share, payable on September 15, 2025. This payout, consistent with its historical pattern, offers a staggering 16.10% dividend yield—a figure that would make even the most seasoned dividend hunter take notice. But in a world where central banks are aggressively hiking interest rates to combat inflation, the sustainability of such a high yield demands closer scrutiny.

The Allure of the Dividend: High Yield, Low Payout Ratio

At first glance, Real Estate Split Corp.'s dividend appears robust. A 16.10% yield is rare in today's market, especially for a company with a dual-share structure that separates income and growth. However, the payout ratio of 2.46% tells a different story. This metric, which measures the percentage of earnings distributed as dividends, is unusually low. The explanation lies in the company's earnings per share (EPS) of -0.80, indicating negative earnings. This paradox—high yield paired with negative earnings—raises red flags. How can a company sustain such a payout when it's not generating profits?

The answer lies in the company's balance sheet. Real Estate Split Corp. is debt-free, a rare feat in the real estate sector. This lack of leverage provides a buffer, allowing the company to maintain distributions without the burden of debt servicing. Its dual-share structure further enhances flexibility: preferred shares offer a stable 5.25% yield, while Class A shares target an 8.0% yield with the potential for capital appreciation. This separation of income and growth is a strategic advantage in a maturing real estate market.

Rising Rates and the REIT Portfolio: A Double-Edged Sword

Real Estate Split Corp.'s portfolio is heavily weighted toward real estate investment trusts (REITs), particularly in Canada. These REITs span sectors like e-commerce, data infrastructure, and multifamily housing—segments that are both resilient and vulnerable to interest rate shifts. Rising rates typically depress property valuations, as higher borrowing costs reduce the present value of future cash flows. For a company that derives income from these REITs, this could translate into lower dividends and, consequently, pressure on its own payout.

DBRS Morningstar's Pfd-3 (high) rating for the company's preferred shares underscores this risk. While the rating reflects strong credit fundamentals, it also highlights the volatility of the portfolio's net asset value (NAV) in a high-rate environment. As of October 2023, the portfolio's pre-distribution downside protection had fallen to 50.7%, down from 54.6% the previous year. This decline, linked to U.S. regional bank collapses and their ripple effects on commercial real estate, signals growing fragility.

The Dividend Sustainability Equation: Coverage and Contingencies

The company's dividend coverage ratio—1.4 times as of October 2023—provides some cushion but is far from reassuring. This ratio, which measures the ability to cover distributions with portfolio income, suggests that the company is operating on thin margins. To offset this, Real Estate Split Corp. employs strategies like covered call option writing and realized capital gains. However, these are not guaranteed income streams and depend heavily on market conditions.

A critical challenge lies in the projected “grind” on the portfolio's NAV. Over the remaining term to maturity (December 31, 2025), the company's targeted distributions are expected to erode the NAV by 6.9% annually. In a rising rate environment, where liquidity constraints could limit alternative income-generating strategies, this grind could accelerate. The company's reliance on the Portfolio Manager to navigate these challenges without liquidating securities adds another layer of uncertainty.

Investment Implications: Caution Amid Opportunity

For investors, Real Estate Split Corp. presents a high-risk, high-reward proposition. The 16.10% yield is undeniably attractive, but it must be weighed against the company's negative earnings, thin dividend coverage, and exposure to rate-sensitive real estate assets. The dual-share structure offers flexibility, but it also requires investors to carefully assess their risk tolerance. Preferred shareholders may find comfort in the 5.25% yield and strong credit rating, while Class A shareholders should brace for potential volatility in both income and capital.

In a rising rate environment, the company's debt-free balance sheet is a significant advantage. However, this alone cannot offset the broader risks of a slowing real estate market and shrinking NAV margins. Investors should monitor key indicators like the portfolio's dividend coverage ratio, NAV performance, and the effectiveness of covered call strategies.

Final Verdict: A High-Yield Gamble

Real Estate Split Corp.'s CAD 0.13 dividend is a tempting offer for income seekers, but it comes with caveats. The company's innovative dual-share structure and debt-free balance sheet are strengths, yet they cannot fully insulate it from the headwinds of rising rates and a fragile real estate sector. For those willing to accept the risks, this could be a speculative play on a high-yield dividend. For others, a more conservative approach—diversifying across sectors and prioritizing companies with stronger earnings—may be prudent.

In the end, the sustainability of Real Estate Split Corp.'s dividend will depend on its ability to adapt to a rapidly changing economic landscape. Until then, the 16.10% yield remains a siren song, luring investors with the promise of income while demanding vigilance in the face of uncertainty.