Stock Up Sale
The stock market has options for all types of investors, from those seeking windfall growth to steady income. Before you choose a stock, determine what you expect from the money you are investing. If you seek windfall gains, also be prepared to lose the invested money, as high returns have high risks. And if you are looking for immediate income, here is a monthly dividend stock in the commercial real estate space that pays a high dividend.
The current state of the commercial real estate market
The commercial real estate market is in a tight spot. The rising interest rates and weak business environment have made mortgages unaffordable. Companies are not renewing leases or cancelling them altogether. Moreover, US commercial property debt dropped for the first time in two years. And there are signs that delinquencies may rise in US commercial mortgages.
This is the scenario in the United States. All these signs are reminiscent of the 2008 subprime crisis when there was a mass default in loans and mortgages. While many property prices slumped at that time, Canada survived. Canadian REITs sustained the crisis and rose again because of stringent banking regulations.
Like the US, Canadian commercial REITs are seeing the early effects of a possible downturn. Many commercial REITs halved their distributions to keep up with mortgage payments as tenants vacated or reduced their leasing space. Amid the overall sector weakness, investing in commercial property might look like a gamble.
But what if you invest in a REIT that has already crashed and is trading at a hefty bargain? While I do not deny the risk is high, the opportunity for upside is higher. Let’s weigh the risk and rewards to determine if this REIT is worth investing in when the commercial real estate sector is in distress.
A TSX stock for immediate income
True North Commercial REIT (TSX:TNT.UN) is Canada’s pure-play office REIT with 45 properties across seven Canadian provinces. The REIT’s strength is that 80% of its tenants are governments (38%) and companies with high credit rankings (42%). It is not immune to the many challenges of commercial property in the current market environment.
True North’s occupancy rate fell to 91% in March 2023 quarter (from 96% a year ago) as several tenants did not renew their contracts or reduced their leased space. The REIT halved its distributions in March to keep a cash balance for mortgage payments. These challenges pulled True North Commercial REIT’s stock price down 56% to $2.70. As the price fell faster than its distribution, its distribution yield remained high at 10.84%.
It means, for every $2.70 you can get a $0.297 distribution. So if you buy 500 shares for $1,350, you can start earning $12.37/month from September 15 onwards. Your annual payout would be $148, assuming no more distribution cuts.
The risk involved in this TSX stock
True North Commercial REIT stock is oversold, hinting that it is closer to its bottom. The REIT presents a chance to double your investment through capital appreciation when the market revives. Its 10.8% yield (if it manages to sustain it) could double your investment in less than seven years. That’s a combined increase of 300% if this is the bottom of the commercial REIT.
The REIT has taken debt on 59.8% of its gross book value. Its 2.8x leverage ratio shows that the REIT earns an operating profit that is 2.8 times its interest expense and can service its mortgage. It also sold one of its properties, which was 97% vacant, for $17.5 million, bringing in higher liquidity.
Canada’s interest rate could pause after the July rate hike as inflation numbers have significantly reduced. The bank may keep the rates high for some time before reducing them. The REIT has renewed several leases this year and added a new tenant that could keep its occupancy stable and help it sustain the high rate.
While it is a risky investment, True North can give you immediate returns. And if things improve for the REIT, there is significant upside.
