True North Commercial REIT: Buoyed by Strong Tenants

The global pandemic hit the real estate market early and hard. Work-from-home, combined with retail lockdowns, spread quickly throughout cities across the world, and injected an unprecedented level of uncertainty to the sector.

The Vanguard Real Estate Index Fund ETF (VNQ) saw a rapid decline of approximately 25% from February to the end of March in 2020 as lockdowns rolled out.

While real estate overall had lost its attractiveness as an asset class, True North Commercial REIT (TNT.UN) has been able to keep an occupancy rate above 97%, and collected 99% of rents throughout the lockdowns.

True North is a real estate investment trust with a portfolio of entirely office properties. The overall portfolio has 45 properties consisting of 4.7 million square feet, 97% occupancy, a 4.7-year weighted average lease term (WALT), and 76% of its revenues are generated from government and strong credit-rated tenants.

The focus for management has been to generate stable contractual cash flow supported by a high-quality tenant base in urban areas.

With a dividend yield of roughly 8% as of this writing, it provides an attractive and relatively safe investment opportunity for investors. I am bullish on the stock. (See TNT.UN stock charts on TipRanks)

Office Real Estate Industry Outlook

The COVID-19 lockdowns have negatively impacted many industries, office real estate being one of them.

A common concern with this industry coming out of the pandemic is if work-from-home structures will be here to stay in the long term. Sixty-six percent of Canadian respondents to a PwC survey would like to either work in the office most of the time, or split with work from home.

The findings reflect that the market will come back, since people in general like to socialize and are suffering from “zoom fatigue.” PwC’s findings state that working from home can be productive, but is questionable in terms of long-term sustainability.

COVID-19 Impact, Durability

Throughout the pandemic, the REIT has performed surprisingly well, with 99.5% of contractual rents in Q1 and Q2 of 2021 being collected. This is due to the high-quality tenant base, which is based in public service, and/or is well capitalized.

Since March 2020, certain tenants have needed financial assistance through programs such as the Canadian Emergency Commercial Rent Assistance (CECRA) program, and the Canada Emergency Rent Subsidy (CERS) program.

This program has been extended to October 23. Only six tenants, that comprise a mere 0.03% of the REIT’s gross leasable area, participate in CERS.

Same property net operating income (SP NOI) in 2019 was $60.9 million, and just $59.7 million in 2020 (where the pandemic hit and impacted roughly nine months of the year).

This again demonstrates the unique durability of this office-based real estate investment trust even through a global pandemic.

Well Capitalized and Solid Financing Plan

The REIT remains well capitalized, at 57.4% indebtedness to gross book value (GBV), with an interest coverage ratio of just under 3.

The total assets are around $1.4 billion, with a weighted average interest rate at 3.4% and mortgage term of 3.6 years. It also has an at-the-market (ATM) equity program that allows it to sell $50 million worth of units to the public at management’s discretion.

The net proceeds are intended to fund future property acquisitions and other general purposes. As of June 30, 2021, there is $62.5 million total liquidity available for the trust.

Bottom Line

True North Commercial REIT presents a relatively safe investment opportunity, with a tidy dividend.

Although it is entirely an office portfolio, its unique tenant base with mainly government and credit-rated clients allow it to be “pandemic proof.”

This is evident by its extremely low vacancy rate, and lack of government assistance needed by tenants.

Disclosure: On the date of publication, Sean Tascatan had no position in any of the companies discussed in this article.

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