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In uncertain times, consider the defensive stability of grocery store stocks

Investors seeking a safe haven should consider Crombie REIT, a high-yielding trust invested in grocery stores.

When most people walk into a Sobeys or Safeway store, they’re probably not thinking much about the building they’re entering. They just want to get their groceries and go. But there may be an investment opportunity lurking within those four walls, especially for yield-hungry investors who want to own defensive stocks.

A lot of Canadians likely don’t realize that these two grocery banners don’t own their own buildings. Instead, they’re held by Crombie Real Estate Investment Trust (TSX: CRR-UN), which was spun out of Empire Co. Ltd. (TSX: EMP-A), Sobeys’ parent company, in 2006. Empire still owns 40% of its share units, but the rest are available to everyone else.

REITs have long been popular with income-seeking investors in this era of miniscule government bond yields. But while other trusts hold residential, office or industrial properties, all of which are subject to the ups and downs of the economy and real estate markets, Crombie generates 30% of its revenues from a supermarket chain. And if there’s one thing people always need, no matter the economic climate, it’s food.

Thanks to that anchor tenant, which is locked into 10-year-plus leases, Thomas Dicker, a portfolio manager with 1832 Asset Management, thinks of Crombie as more of a bond than a stock. “Cash flows and liabilities are long-dated compared to its peers,” he says. “That’s appealing in this low-rate environment. In the context of the REIT world, Crombie behaves a bit like a long bond.”

Unlike a bond, though, Crombie pays a 6% dividend yield and has potential to grow; shares are up 14% this year. In 2013, it acquired 68 Canada Safeway locations that Empire bought from U.S.-based Safeway Inc. That extended Crombie’s footprint into some prime spots in Western Canada. It plans to modernize its stores over the next five years, while also building residential space on top of its locations in attractive areas like Vancouver. That will give it another source of revenue. Meanwhile, Sobeys will continue paying rent during the building phase, says Matt Kornack, an analyst with National Bank.

Crombie’s ties to Empire have a downside, though. The grocer posted a $942-million loss in the second quarter due to ongoing troubles integrating the Safeway operations. In September, DBRS downgraded Empire from “stable” to “negative.” That could result in store closures or, more likely, a further divestment of Crombie units. Fortunately, Empire is not Crombie’s only tenant. Most of its buildings are part of shopping complexes, which Crombie owns; Best Buy, Reitmans, LCBO and Rogers Communications all lease stores within those shopping areas, says Dicker.

Like all REITs, Crombie is vulnerable to an interest rate increase in the U.S. But overall, Kornack thinks it’s an ideal investment for someone who doesn’t like surprises. “This should be a fairly low-volatility return profile,” he says. “And in this low-rate and low-growth environment, you’re getting a company with sizable yield and incremental growth on top of it.”

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