Revealed: This 7.9% Yielder Is Canada’s Cheapest REIT

You won’t believe how cheap Morguard Real Estate Investment Trust (TSX:MRT.UN) stock is today.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are two main ways for investors to make money in real estate investment trusts (REITs).

The first is to buy the finest names you can and hold them over the long term. These companies own terrific buildings in locations where demand for good real estate exceeds supply. It’s no coincidence that these REITs tend to own a lot of Toronto-area assets. It’s the hottest real estate market in the country.

The other strategy is one copied from some of the best real estate investors of all time. This method focuses on out-of-favour assets, buying up shares of companies that own the most undesirable property. As real estate is generally a cyclical asset class, these buildings inevitably turn from being toxic to back in favour again. It’s only a matter of time.

This type of distressed real estate investing doesn’t just come with the benefit of outsized capital gain potential. These REITs often come with succulent dividend yields as well. Put the two together and you have a powerful combination.

Let’s take a closer look at one of these unloved REITs, Morguard Real Estate Investment Trust (TSX:MRT.UN).

Incredibly cheap

There are two main ways an investor can value a REIT. They can look at the company’s price compared to its earnings and compared to its net asset value.

Let’s start with net asset value. Morguard’s portfolio of 49 different office, retail, and industrial properties is valued at $1.58 billion once we factor in all liabilities. Shares have a current market capitalization of $741 million, putting the stock at a hair under 50% of net asset value.

In other words, investors are buying $1 worth of real estate for $0.50.

The stock is also cheap on a price-to-earnings perspective. Morguard judges its true profitability by using funds from operations (FFO) instead of net earnings, as the latter number is influenced by changes in the underlying value of the portfolio. In 2018, Morguard reported total FFO of $1.56 per unit, putting shares at just 7.8 times FFO.

Why exactly is the stock so cheap, anyway? Some investors think Morguard is inflating the value of its Alberta assets, buildings that are struggling to find tenants in a weak economy. But total occupancy is still at 93%, and it hasn’t really budged in a few years.

Other folks are concerned that some of Morguard’s premier assets are regional malls in smaller cities like Red Deer, Grande Prairie, and Saskatoon. The trust also has a healthy exposure to the Calgary office market, which is experiencing some pretty significant vacancy.

While these are problematic, I don’t think they’re big enough to push a stock down to 50% of its net asset value.

Get paid to wait

One of the problems with waiting for cheap companies to recover is you don’t earn much of a return during a process than can, at times, take years.

Morguard falls under this category as well. The company could trade at this discounted level for a long time if the Alberta economy doesn’t recover.

Fortunately, investors are getting paid a handsome dividend while they wait. The current yield is 7.9%, which would be an acceptable return over the long-term even if the stock did nothing.

The dividend looks solid, too. The company pays out $0.08 per share each month, or $0.96 annually. After accounting for expansion projects in 2018, it earned $1.14 per share in adjusted funds from operations, giving us a payout ratio of approximately 85%.

The bottom line

REITs don’t get much cheaper than Morguard REIT. I believe that investors who get in today can count on a significant capital gain to go with their generous dividend. The only problem is any increase in the share price could take years to develop, but this analyst thinks it’s worth the wait.

Should you invest $1,000 in Capital Power right now?

Before you buy stock in Capital Power, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Capital Power wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns shares of MORGUARD REIT.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Allocate $12,000 Across Canadian Value Stocks for Retirement Planning

Suncor Energy Inc (TSX:SU) is a Canadian energy stock worth investigating.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Stocks You Can Buy Now and Get Monthly Payouts From for Decades

Are you looking for monthly payouts? There are more than a few great investments that can fuel a monthly income…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Where I’d Put $1,000 Right Away in 2 Top Canadian Stocks for Growth

These two Canadian stocks are strong options and have been for decades, and that's not going to change anytime soon.

Read more »

investment research
Dividend Stocks

How I’d Turn the $7,000 TFSA Contribution Into Monthly Passive Income

Here's how this TSX dividend stock can help you earn more than $50 each month in tax-free passive income.

Read more »