Pat McKeough recently responded to a Member of his Inner Circle who asked for his advice on a Canadian REIT that specializes almost exclusively in office properties.
True North Commercial REIT has roughly 60% of its properties in Ontario and focuses on government and high-credit-rated tenants. The company grows by acquisition; its biggest addition came in 2017 with the purchase of 11 properties for over $212 million. Its revenue has jumped in the past five years and its units yield a very high 8.7%. The REIT’s long-term leases and stable tenants work in its favour, says Pat, but growth by acquisition brings risk.
Q: Dear Pat: As a grateful Inner Circle member, I thank you and your team for the excellent advice over the years. Please, would you offer your observations and analysis of TNT.UN?
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A: TRUE NORTH COMMERCIAL REIT (symbol TNT.UN on Toronto; www.truenorthreit.com) owns and operates a portfolio of 41 commercial properties. They make up about 3.3 million square feet, in urban centres and what the REIT sees as Canada’s select secondary markets.
True North has 97.7% of its assets in office properties and 2.3% in industrial. The REIT aims to focus on long-term leases with government tenants (currently accounting for 38.1% its revenue) and high-credit-rated tenants. True North’s overall occupancy rate is 96%.
The REIT has 60.4% of its leasable area in Ontario, 13.4% in Nova Scotia, 12.5% in Alberta, 10.0% in New Brunswick, and 3.7% in B.C. In the second quarter 2018, it made three new acquisitions, a 274,000 square foot office tower in north Toronto whose tenants include Ontario’s Ministry of Government Services; and two smaller office properties in Abbottsford, British Columbia and Markham, Ontario.
True North began operations in late 2012. Since then, its revenue has jumped 225.6%, from $17.2 million in 2013 to $56.0 million in 2017. Cash flow, too, has soared, rising 339.2%—from $5.1 million to $22.4 million. However, due to more units outstanding from acquisitions, cash flow per unit gained just 22.4%, to $0.60 from $0.49.
Dividend stocks: Revenue and cash flow both jump in most recent quarter
In the three months ended June 30, 2018, True North’s revenue rose 57.9%, to $19.9 million from $12.6 million. Cash flow jumped 48.0%, to $7.7 million from $5.2 million. On more units outstanding, cash flow per unit was $0.15, slightly down from $0.16 a year earlier.
Most of the REIT’s growth is due to acquisitions. In 2017, it paid $212.7 million for nine office properties, totalling 1.0 million square feet. Those buildings are 92.4% occupied, with 74% of their revenue generated by government and high-credit-rated tenants.
True North’s focus on long-term leases with those types of tenants enhances its appeal. However, its growth by acquisition adds risk. The REIT currently pays a monthly distribution of $0.0495 a unit. That makes for a very high 8.7% annualized yield. The dividend, nonetheless, appears safe.
Inner Circle recommendation: True North Commercial REIT is okay to hold, but only for aggressive investors.
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