Are you looking for a high-yield monthly dividend stock to generate regular passive income? The best bargains might be found in the far corners of the Canadian stock market. A tiny real estate investment trust (REIT) with a $1.2 billion property portfolio is making monthly distributions that yield a staggering 9.4% annually, with units trading at a 41.5% discount to their fair value.
BTB Real Estate Investment Trust (TSX: BTB.UN) is a high-yield dividend stock offering generous monthly distributions to investors. Its undervalued units could recover as interest rates fall. Here’s why you should consider the small Canadian REIT as a potential source of regular monthly passive income and capital gains as its portfolio occupancy rates and borrowing costs stabilize.
BTB REIT: Generous distributions from diversified income sources
Not all Canadian office REITs are created equal, but even high-quality portfolios can face deep discounts during periods of widespread disfavour. This might be the case for BTB REIT, a small, diversified Canadian property trust owning 75 properties comprising 6.1 million square feet of gross leasable area (GLA). The REIT’s $1.2 billion portfolio is significantly concentrated in Quebec, with 42.7% in suburban office properties, 36.6% in industrial space, and 20.7% in necessity-based retail properties.
Since the pandemic, the market has generally frowned upon office properties as businesses reassess their office space needs, leading to growing office vacancies. However, BTB REIT’s suburban offices seem stable.
The REIT reported an improved total portfolio occupancy rate of 94.5% (on a committed basis) at the end of the last quarter. Office occupancy rates improved to 88.6% from 86.6% a year ago. Portfolio lease renewal rates increased dramatically to 67.7%, up from 37.7% a year ago, and the average lease term of 5.7 years remains respectable.
Interestingly, the trust leased office space at rates 8.6% above prior rents during the past quarter and reported positive same-property net operating income growth.
Despite maintaining strong portfolio occupancy rates, paying well-covered distributions, and growing its same-property net operating income, BTB REIT units trade at a 41.5% discount to their most recently reported net asset value of $5.47.
Should You buy for monthly passive income?
BTB REIT’s monthly distributions during the first quarter of 2024 comprised a seemingly safe 83.9% of its adjusted funds from operations (AFFO). Distributions remain secure despite a 4,000,000 increase in outstanding units as investors use the trust’s distribution-reinvestment plan (DRIP) to reinvest their monthly distributions into new equity units at prices 3% cheaper than the TSX weekly average closing prices. The trust offers a 3% discount on DRIP units.
Stronger occupancy rates and positive re-leasing spreads help sustain BTB REIT’s monthly distributions. Investors could gain more wealth if the trust’s current plan to turn some properties into mixed-use, higher-density assets receives approval in Quebec.
How much income could you earn?
| Company | Recent Price | Investment | No. of Units | Distribution Rate | Total Distribution | Frequency | Total Annual Income |
|---|---|---|---|---|---|---|---|
| BTB REIT (TSX: BTB.UN) | $3.17 | $7,000.00 | 2,208 | $0.025 | $55.20 | Monthly | $662.40 |
Canadian REIT distributions are treated as regular income by the Canada Revenue Agency, making them ideal for passive income investments when placed in a Tax-Free Savings Account (TFSA). As shown in the table above, an investor seeking high-yield passive income could earn as much as $662 in annual passive income, or more than $55 every month, from BTB REIT if they allocate their entire $7,000 TFSA contribution room for 2024 to this undervalued monthly dividend stock.
Investment risks to note
That said, dividend yields in the 9% range usually indicate elevated investment risks. Diversification across more assets is essential.
Investors should continuously monitor the trust’s office portfolio for heavy re-leasing discounts and weakening occupancy rates. Leases on about 18.2% of the total portfolio will expire between this year and 2025, making lease renegotiations crucial for distribution safety.
Additionally, although the trust’s 58% total debt ratio is within normal ranges for a REIT, it’s important to watch its average interest rate of 4.4% as mortgages mature while interest rates remain elevated. Any further rate cuts from the Bank of Canada in 2024 could significantly benefit the trust.
BTB REIT units have generated 13.3% in total returns year to date.
