The Canadian real estate sector is showing signs of improvement. Recent data points to a revived housing market, with home sales and prices climbing in major cities as buyer confidence returns. This renewed optimism is beginning to ripple into the broader real estate landscape, making it a fascinating time for investors. Yet, while the residential market grabs headlines, a potentially bigger opportunity is in the slowly recovering office sector. True North Commercial Real Estate Investment Trust (TSX:TNT.UN) is trading at a staggering 67% discount to the value of its properties, all while paying a generous 7.4% distribution with industry-leading cash flow coverage. For investors seeking a high-yield real estate passive income source to buy with monumental upside, this undervalued real estate play could be the ultimate contrarian play for October 2025.
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True North Commercial REIT: Weathering a perfect storm
True North Commercial REIT owns a portfolio of 39 office properties comprising 4.5 million square feet of gross leasable area. The Canadian office REIT has been navigating a difficult period, which included suspending its monthly distributions in late 2023 to strengthen its financial position as interest costs soared. That tough decision paved the way for a remarkable comeback in 2025.
In April, the trust reinstated its monthly distributions, and the payouts now boast a juicy 7.4% annual distribution yield. What makes this income stream particularly attractive is its foundation. The monthly distribution is supported by an incredibly low AFFO payout ratio of just 41%. AFFO, or Adjusted Funds From Operations, is a key measure of a REIT’s distributable cash flow. A low payout ratio means only 41% of that cash flow is needed to cover the distributions, leaving a significant safety cushion and ample cash for other uses. This is a hallmark of a potentially sustainable dividend.
What’s remarkable about True North’s portfolio is its ability to retain tenants given its strong 93% occupancy rate by mid-year 2025. Its tenant portfolio is comprised of 72% government and investment-grade credit-rated tenants who rarely default on their rentals. The trust well structured its $1.2 billion asset portfolio to thrive as companies fall in love with offices again.
A deeply discounted REIT to buy in October?
Management isn’t just sitting on True North’s extra cash. Trustees are actively working to close the deep gap between the trust’s unit price and its Net Asset Value (NAV), which is the per-unit accounting value of its property portfolio. How? Management is aggressively buying back REIT units on the open market. The trust is selling some office properties close to their full accounting value and using the proceeds to repurchase units that trade at a 66.9% discount. This shrewd move is accretive to NAV and future earnings for every remaining unit. Management clearly believes the market is grossly underestimating the REIT’s business.
So, why is the public so unsure? The office sector has faced well-documented headwinds, and True North carries a total debt ratio of 61.8%, which is on the higher side. However, there’s a silver lining. With interest rates declining in Canada, the REIT has a prime opportunity to refinance its debt at more favourable rates over the next two years, reducing interest expenses.
True North Commercial REIT’s debt had a weighted maturity of 2.6 years going into the third quarter of 2025.
The Canadian real estate stock for contrarian investors in October
True North Commercial REIT presents a fascinating proposition: a high, well-covered monthly distribution and a clear path for capital appreciation as management works tirelessly to close the NAV gap through strategic asset sales and unit buybacks. While the office sector currently requires a strong stomach for risk, the potential reward for taking the contrarian view is substantial. For investors looking for a real estate passive income source to buy with significant upside, TNT.UN’s unique combination of a 7.4% yield, a rock-solid 41% payout ratio, and a colossal 66.9% NAV discount makes it a standout candidate for a long-term portfolio.
