The state of Canada’s real estate sector could gradually revive once the Bank of Canada starts with its interest rate cuts. Those who were optimistic about the rate cuts could invest in real estate investment trusts (REITs) while they trade at lower prices. CT REIT’s (TSX: CRT.UN) unit price is down 13%, and this dip has nothing to do with its ability to pay distributions. Is this dip an opportunity to buy and lock in a dividend yield of 7%? Let’s find out.
The long-term business opportunity for this dividend stock
CT REIT is Canadian Tire’s (TSX: CTC.A) real estate arm. The REIT acquires properties from the retailer and leases them back to the retailer. Why would Canadian Tire do such a thing? To separate the real estate business and the retail business. Owning a property requires you to develop and maintain the facility. CT REIT takes care of that. It not only develops stores but also intensifies them and manages the property so Canadian Tire can focus on retail.
- CT REIT is currently developing 17 new Canadian Tire stores and intensifying 16.
- Canadian Tire has approximately 15-20 properties that meet the investment criteria, which means they are ideal for acquisition by CT REIT. The arrangement between the two is cost-effective as the REIT doesn’t pay acquisition or disposition fees to its parent.
- Moreover, CT REIT acquires third-party properties with Canadian Tire stores. Around 25% of Canadian Tire properties are owned by third parties.
The idea behind all these numbers is to show investors the future growth potential of CT REIT’s current business strategy of acquisition, development, and intensification. All three activities generate rental income for CT REIT. And the REIT funds these activities from unsecured debentures and retained earnings from rental income.
The REIT can sustain itself for the long term by focusing on acquiring all Canadian Tire properties. However, the REIT’s unit price is tied to Canadian Tire’s success and stability.
Why did this dividend stock fall 13%?
Since the retailer leases more than 90% of CT REIT’s properties, the REIT enjoys strong occupancy and rental income. As per the lease, the REIT hikes rent by 1.5% annually. If the operations are doing fine, why did the dividend stock fall?
The unit price of the REIT was affected by the falling property prices. The REIT’s biggest asset is its property portfolio. The fair market value of this property portfolio was affected by the macro conditions and the real estate market. All Canadian REITs have been in a downtrend since mid-2022.
Real estate is a market that is here to stay. Land prices appreciate in the long term. The current dip is temporary as property prices soared faster than the normal pace post-pandemic. A recovery in the economy could also lead to a recovery in property prices and drive CT REIT’s unit price up.
Is CT REIT stock a buy at the dip?
The dip in the REIT’s unit price has created an opportunity to lock in a 7% annual yield paid in 12 equal installments. Moreover, the REIT is likely to increase its distribution by 3% in July, which could see a surge in unit price. And if the Bank of Canada announces a rate cut in its June meeting, the stock price of all Canadian REITs could see a steep recovery.
Now is the right time to buy the stock and benefit from the recovery rally and dividend growth.
