Value Investors: You Need to Check Out This Ridiculously Cheap Stock

You won’t believe how big of a bargain Melcor Real Estate Investment Trust (TSX:MR.UN) shares are today.

Man holding magnifying glass over a document

Image source: Getty Images.

With the TSX Composite Index bumping up against new highs, it’s understandable why value investors are getting a little frustrated. It was just a few short months ago everything seemed cheap, and now inexpensive stocks are few and far between.

But there is some value out there today. You just have to look a little harder to find it. Let’s check out one of Canada’s cheapest REITs, a company trading at a huge discount to its peers on a number of different metrics.

Enter Melcor

Investors should note there are two Melcor investments on the Toronto Stock Exchange. The parent company is Melcor Developments, while we’re going to focus on the majority-owned subsidiary, Melcor Real Estate Investment Trust (TSX:MR.UN).

Melcor REIT owns 36 properties in Alberta, Saskatchewan, and British Columbia, totaling close to three million square feet of gross leasable area. A little more than 50% of assets are in office space, approximately 40% in retail, and the remainder are invested in industrial property.

The company’s large exposure to the Alberta market has been viewed negatively, as the province continues to struggle with low energy prices. But occupancy continues to be in the 90% range, and the company has been able to successfully negotiate lease renewals in today’s soft market.

The portfolio has a nice mix of tenants, with no one renter comprising more than 5% of total rents. Top tenants include the Government of Alberta, Royal Bank, and Alberta Health Services. Like any REIT, the company has the potential to buy third-party assets. But it also has the big advantage of having the right of first refusal to buy any assets the parent company develops. This pipeline could increase the REIT’s size from just under three million square feet of leasable area today to up to 9.5 million by 2029.

Melcor is also expanding its development business to the United States, which could potentially offer the REIT attractive diversification opportunities in the upcoming years.

2018’s results were mixed. Revenue crept up 5% versus 2017’s results, surpassing $70 million for the first time. But adjusted funds from operations were weaker than the previous year, falling 5% to $0.68 per unit. Part of this decrease was from giving tenants rental incentives, as well as higher leasing fees. Investors should note that funds from operations, which doesn’t include these one-time costs, checked in at $0.93 per unit.

Shares trade at $7.76 each as I write this. This gives the stock a price-to-funds from operations ratio of just 8.3 times, making it one of the cheapest REITs on the Toronto Stock Exchange today. And shares trade at a mere fraction of the company’s book value, which stood at $15.04 per unit at the end of 2018.

Investors are also getting a fantastic dividend — a payout that is supported by funds from operations. The current distribution is $0.68 per share annually, a dividend that has been maintained since the trust’s 2013 IPO. That’s good enough for an 8.7% yield today.

The bottom line

You won’t find many REIT’s cheaper than Melcor. The fund trades at a low price-to-funds from operations and price-to-book value ratio, which should revert to more normal levels as Alberta’s economy recovers. The company also has nice growth potential, both from acquiring properties from the parent and scooping up cheap Alberta-based locations from distressed sellers.

Value investors, take note. This opportunity won’t be around forever.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any of the stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »