Chartwell Retirement REIT (TSX:CSH.UN) is a very interesting Real Estate Investment Trust (REIT) to consider, as this is perhaps one of the worst performing REITs out there in recent years. With most of the company’s peers outperforming over the same time span, some investors have been left shaking their heads, wondering what happened to this trust.
At a high level, I believe Chartwell REIT rose too quickly, too fast in the mid-2010s. Chartwell REIT is in one of those "hot/sexy" markets in which investors tended to jump in with both feet before actually looking under the hood to see what they were working with.
Retirement homes should, in theory, outperform residential or retail or office in the coming decades. The question then is what is just so bad under the hood that would cause this trust’s unit price to essentially stay flat in recent years?
The answer is complicated, but is generally predicated on the fact that Chartwell REIT has no earnings in recent years, but is paying a dividend on par with its peers (and REITs tend to need to have high dividend payouts, as this is one of the key reasons investors buy REITs).
The trust’s payout ratio is thus way out of whack, since the company is not able to pay its distribution directly from its earnings, but rather has to either borrow to pay its dividend or raise equity, both of which are options that will inevitably destroy the trust’s unit price over time.
While Chartwell REIT is in a very lovely space, I will continue to pass on this name for the foreseeable future.
Invest wisely, my friends.
