CT REIT: 73% dividend, 6.4% yield, trading at a discount (OTCMKTS:CTRRF)

introduction

I have a sizable buy position in CT Real Estate Investment Trust.TSX:CRT.UN:CA) (OTC:CTRRF) I like the Canadian REIT’s exposure to Canadian Tire (CTC.A:CA) (OTCPK:CDNAF).) (OTCPK:CDNTF) CT REIT was spun off. Canadian Tire remains the REIT’s largest tenant., which accounts for approximately 91% of rental revenue (including all associated brands). Some investors say this is a ‘no’, but I see this as a positive factor. Canadian Tire has a vested interest in maintaining a strong relationship with CT REIT, its largest shareholder and tenant.

2023 was a good year for CT REIT

CT REIT is enjoying a very high occupancy rate, with a 99.1% occupancy rate at the end of 2023, thanks to its excellent relationships with its largest tenants. This obviously also immediately It has a positive impact on the REIT’s NOI and AFFO performance.

As you can see below, the REIT reported total net operating income of C$111.5M in the last quarter of the year, resulting in a theoretical operating return of approximately C$445M for the year. NOI reported.

This is just a theory, as the REIT completed several development projects in the fourth quarter, and we will see the full impact of these expansion efforts in 2024.

While the change in net operating income was positive, we also wanted to see a clear improvement in our FFO and AFFO performance. This is where most REITs are struggling these days, as rising interest rates in financial markets are weighing on their results. Fortunately, this is not the case with CT REITs. As you can see below, fourth quarter FFO increased approximately 2.8% to C$77.7 million, and full-year FFO increased 4%.

Additionally, adjusted funds from operations (“AFFO”) increased 4.3% in the final quarter of the year and 5.4% for the full fiscal year 2023. And as you can see in the image above, AFFO includes capital expenditure reserves. Capital expenditure reserves are estimates by management to measure the standardized capital expenditures required to maintain a property in good condition. For CT REIT, this amount is estimated at C$25 million per year, equivalent to almost 0.4% of the book value of its assets.

On a per-share basis, AFFO was pegged at C$1.205 per share in 2023. This represents an increase of 4.9% compared to C$1.149 per share in 2022. The image below shows C$1.203 per share, but this is based on diluted shares rather than active shares.

The total distribution paid in 2023 was C$0.883 per share, resulting in a payout ratio of just over 73% (see below). This means the REIT can maintain:

AFFO growth is actually quite impressive considering the current state of the financial markets. The average cost of debt for CT REITs has also increased, with REITs now paying about 50 basis points more than they did two years ago. The current average cost of debt is approximately 4.1%, and since CT REIT’s maturities are staggered, the average cost of debt will gradually increase.

The price of the most recently issued bond was set at around 5.8%, but financial market interest rates will undoubtedly fall between 2024 and 2026, and since the 5.8% bond (maturity in 2028) was unsecured, the refinancing rate is expected to be lower in the future. It’s possible. . If borrowing costs become too high, CT REITs can bring collateral debt with lower interest rates to market with relative ease.

Also, don’t forget that our lease agreement with Canadian Tire includes a 1.5% annual rent escalator, and that this rent increase will cover the expected increase in annual interest expense. The annual rent increase based on the escalator is C$6M per year, which will compensate for the 150 basis point increase in debt cost on the C$400M annual refinancing. With average refinancing requirements of just C$1.2 billion between 2024 and 2027, or C$300 million per year, we expect the rent escalator to fully cover interest rate increases.

The debt ratio is still low. At the end of 2023, CT REIT had balance sheet debt of approximately C$2.9B and cash of approximately C$21M against a net debt position of C$28.6B.

The total book value of the property was estimated at C$69.4B, resulting in an LTV ratio of approximately 41%. In addition to being easy to manage, the property was valued at a final capitalization rate of 6.71% and a discount rate of 7.20%. As of the end of 2023, NOI divided by asset book value was 6.4%.

As you can see above, the 75% bp cap rate increase alone would reduce the fair value of the property by just C$682 million (setting aside approximately C$70 million in annual AFFO, excluding the impact of rent increases). Shareholder). Even in this case, the LTV ratio is only 46% while the NAV/occupancy is still around C$13.5.

investment thesis

This is why I continue to add to my position in CT REIT. We believe that our dependence on our primary tenant is a strength, not a weakness. Although Canadian Tire’s recent financial results have been disappointing, it doesn’t look like the company will be going out of business anytime soon. The stock currently trades at a 15% discount to book value, trading at just 11.5x 2023 AFFO (including ongoing Capex allocations).

Meanwhile, the distribution is C$0.898 per share per year (paid monthly), which represents a dividend yield of approximately 6.4%. CT REITs typically raise their dividends in June, and I’m expecting another annual dividend increase of C$0.02-0.025. This would result in an annual dividend of C$0.92 per share, yielding a yield of nearly 6.6% based on a share price of approximately C$14. .

I have a long position in CT REIT and continue to add to this position on weakness.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.