So what is CT REIT (TSE:CRT-UN)?
In 2013 Canadian Tire spun off most of its owned real estate into CT REIT.
The portfolio has evolved a little bit, but CT REIT is still strongly tied Canadian Tire.
More than 91% of CT’s rent comes from Canadian Tire. No other REIT in Canada has as much rent coming from one tenant.
In most cases, having one tenant make up so much of a REIT’s income would be a bad thing. If that tenant runs into business trouble and can’t pay its rent or it closes stores, the REIT would suffer. CT REIT’s appeal on the other hand is how much of its space is leased to Canadian Tire.
Canadians are of course familiar with Canadian Tire
It’s an iconic brand with some strength (more than 80% of Canadians shop at Canadian Tire each year).
Even with a global pandemic this year, Canadian Tire’s revenue through the first three quarters was down less than 3% from last year. In the third quarter, without many of the lockdowns that happened in the second quarter, revenue was 9.6% higher than last year.
The strong financial performance this year shows that Canadian Tire is a great anchor tenant.
Canadian Tire still owns 69.1% of CT REIT, so it has skin in the game and an incentive to treat the REIT fairly. In September 2019, Canadian Tire sold $150 million of CT REIT units, showing the company will use its investment in the REIT to raise cash.
Canadian Tire wants the price of CT REIT to be high in case it wants to sell units, which is a good thing for unitholders of CT REIT, who also want the price to be high.
While Canadian Tire is the best thing CT REIT has going for it, it’s not the only thing
46% of CT’s rent comes from properties in Canadas “VECTOM” markets – Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Montreal. These are Canada’s best, most urban markets.
21% of the REIT’s rents come from Toronto alone. Toronto is the strongest real estate market in the country, and Canadian Tire properties are large so the land underneath the Toronto properties has a lot of value.
CT REIT has a lot of locations in Canada’s largest urban markets, which means the land is worth a lot but also that there are a lot of people that live or work near the property, a good thing for a retail tenant. But even in smaller, secondary markets, CT’s properties are usually one of the dominant shopping destinations for the community.
CT REIT Growth
CT REIT is one of the most stable REITs in Canada, but it is still delivering growth for investors.
Since its 2013 IPO, CT REIT has raised its distribution every year at a pace higher than inflation. That makes CT REIT a great fit in a dividend growth portfolio. The AFFO (a REIT’s free cash flow) payout ratio is just 77% so far in 2020, so the distribution is safe.
The REIT currently yields 5.47%.
5 year dividend adjusted return CT REIT (TSE:CRT-UN) vs S&P/TSX
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Market Cap: $1.57 billion
Dividend Growth Streak: 7 years
Payout Ratio (Earnings): 68.12%
1 Yr Div Growth Rate: 3.98%
The growth is going to continue as well.
Canadian Tire’s leases include a 1.5% annual rent increase, which falls straight to the bottom line because Canadian Tire is on triple net leases (the tenant pays property expenses, insurance, taxes, and capital expenditures).
Whenever Canadian Tire sells any of its 47 remaining company owned properties, CT REIT gets the first chance to buy them.
About 25% of Canadian Tire locations are owned by third parties, when those owners are looking to sell, CT REIT is one of the most logical buyers. The REIT has purchased properties from third party owners that do not have a Canadian Tire store on them when the value was right.
CT is also Canadian Tire’s preferred developer for when a new location is being built
Developing new Canadian Tire locations is another avenue for growth.
Finally, CT is able to build new buildings on its existing Canadian Tire anchor properties, a process known as “intensification”.
Not only is CT REIT stable and growing, but it is also not expensive for its quality. CT is trading at just 15x AFFO and right around net asset value.
Given the attractive yield, and the growth in AFFO and the distribution, CT REIT qualifies as a wonderful company trading at a fair price, to paraphrase Warren Buffett.
Overall, CT REIT is a strong real estate investment trust
A lot of Canadian investors are weary about CT REIT having so much reliance on a single tenant. However, we’re talking about an iconic Canadian brand, and one that has shown a continued ability to get customers inside of its stores, despite a booming e-commerce situation. Some REITs are benefiting from the e-commerce movement and the need for more space, such as Dream Industrial REIT (TSE:DIR.UN).
CT REIT isn’t overly expensive, and it has a compound annual growth rate in terms of stock price of just over 3%. Combine this with a mid 5% yield, and you’ve got a reasonable return.