October has generally been a moderately positive month for the S&P/TSX composite index. Looking back to the year 2000, during 10 of the past 15 years, the TSX index has delivered positive returns for the month. If we exclude the recession years, 2008 and 2009, the average return is just more than 1 per cent – modest, but at least positive.
However, given global economic growth concerns, potentially cautious outlooks by management teams during this reporting season, combined with many stocks that are trading at fair valuations, the TSX index might struggle to gain momentum and investors could see more volatility in equity markets.
For investors seeking shelter from potential volatility and looking for income, CT Real Estate Investment Trust is a solid defensive investment.
The REIT
Headed by a seasoned management team, CT REIT owns income-producing commercial properties, with Canadian Tire stores being its major tenant and having an 83.9-per-cent interest in CT REIT. At the end of the second quarter, the REIT's portfolio consisted of 285 properties located across the country.
Listed below is the investment thesis, illustrating this REIT's attractive features for investors seeking safety and reliable income.
- Defensive. Canadian Tire is the REIT’s largest tenant, paying 96.5 per cent of the REIT’s annualized base minimum rent. Canadian Tire is a stable tenant. Last quarter, the REIT had a 99.9-per-cent occupancy rate.
- Stability. CT REIT has average annual rent increases built into the property leases at Canadian Tires stores of 1.5 per cent, providing the REIT with predictable same-store net operating income growth. In addition, its average remaining lease term is approximately 14 years. Only approximately 13 per cent of its leases expire in the next decade.
- Cash flow growth. Management is focused on cash flow stability as well as growth. In August, management announced five investments in acquisitions, development and “intensifications” with expansion and improvements to existing Canadian Tire stores.
- Balance sheet strength. At the end of the second quarter, the debt-to-gross book value was 48 per cent. Given CT REIT’s indebtedness ratio is at a respectable level, its cash levels are at $46.7-million and it has an unused bank credit facility of $200-million, CT has sufficient liquidity available to fund future growth.
- Low interest rate environment. Government of Canada bond yields remain low and have been falling, making the 5-per-cent yield for this REIT attractive for investors.
Dividend yield
This REIT pays unitholders a monthly distribution of 5.525 cents a unit, equating to an annualized yield of more than 5 per cent. The AFFO (adjusted funds from operations) payout ratio was 83 per cent at the end of the second quarter, giving management the ability to continue to raise the monthly distribution.
Valuation
The REIT trades at a price-to-AFFO multiple of 15 times the 2016 consensus estimate – a fair valuation relative to its peers.
Chart watch
Since the initial public offering in October, 2013, the REIT has appreciated from $10 to approximately $13 in less than two years.
Year-to-date, the unit price has appreciated 5 per cent, outperforming the 8-per-cent loss for the S&P/TSX composite index and the 4-per-cent loss for the S&P/TSX capped REIT index. The units have been range bound for much of the year, trading largely between $12 and $13.25, and are currently nearing the upper end of this trading band. Average daily volume is low, just above 50,000 units.
There is technical resistance around $13.40, its previous high set in February, and downside support around $12.60, near its 50-day moving average, and failing that at $12.
The relative strength index is at 58, suggesting the units are neither overbought nor oversold. (A level around 50 is considered a neutral condition. A level at or above 70 represents an overbought condition; a level at or below 30 represents an oversold condition.)
Analysts' recommendations
According to Bloomberg, there are 11 analysts that cover this REIT; two have buy recommendations and nine have hold recommendations. One-year price targets range from $12.75 to $13.75. The average one-year price target is $13.30, suggesting the units are nearly fully valued.
The consensus AFFO forecast is 80 cents a unit in 2015, rising to 85 cents a unit in 2016. CT REIT will be reporting third-quarter results the week of Nov. 9.
The bottom line
This is a solid investment for investors seeking safety and the 5-per-cent yield is sustainable. It is a buy below $13.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.