CT REIT is Still a Buy Despite Surging +16% in Three Months

As contrarian investors, we look to invest in ideas that are temporarily out of favour.

Until recently, real estate had been a contrarian investment. Not knowing the true long-term effects of work-from-home, many have sought to avoid the space, especially in a high interest rate environment. However, real estate comprises many subsectors – office, retail, apartments, and industrial properties – all with different outlooks. 

Last June, we purchased shares of CT REIT. The REIT – which stands for “real estate investment trust” – owns Canadian Tire’s real estate properties. 

At the time of our purchase, we were shocked at how inexpensive the valuation had become. After trading above 14x its adjusted funds from operations (which is another way of saying its cash flow left over after spending money on its assets) in 2019, the valuation had collapsed to only 11.5x on the day we bought it for clients.

Do you remember where you were on March 16, 2020? That was the date the COVID-19 lockdowns began. The market was in a panicked freefall that entire week. It reminded us of September 2008. Nevertheless, on March 16, 2020, CT REIT’s valuation had dropped to 11.5x – the exact same multiple as June 10, 2024, when we bought shares for our clients. 

Though higher interest rates make real estate less valuable, that dirt cheap multiple made no sense at all. CT REIT has an enviable occupancy rate at 99.4%. The average lease life is 8 years, which is one of the longest terms in the entire real estate market. At the time we bought it, the distribution yield was almost 6.7%. Since going public 11 years ago, CT REIT has increased its distribution 11 straight times by a 4.1% compounded annual growth rate. 

Since our June purchase, rate cuts are now well underway, and CT REIT’s price has appreciated just over 16%. 

Though it now trades at 12.9x adjusted funds from operations, CT REIT accompanied a valuation multiple well over 15x earlier in its life as a publicly traded REIT. We believe it will return to those levels, implying another 15-20% upside. And while we wait, clients are being paid a 5.8% distribution yield. 

While Canadian Tire’s domestic concentration may be a concern to some investors, it isn’t for us. Many Canadian brands that venture into the U.S. have been unsuccessful. Locations are fairly spread out throughout Canada with 41% of its square footage in Ontario, 27% in Western Canada, 24% in Quebec, and 9% in Atlantic Canada.

CT REIT’s revenue is contracted and predictable. Canadian Tire stores, which constitute almost 90% of the square footage, have a 1.5% rent escalator each year. The other 10% are non-Canadian Tire assets, which have been signing rent renewal increases in the high single digit range as of late. 

Because of its high occupancy, strong 5.8% distribution yield, and predictable revenue, we’re still holders of CT REIT for our clients and have been adding it to the portfolios of new clients. 

-written by Jeff Pollock