I was absolutely thrilled to find out about Canadian Net REIT (TSXV:NET) around April this year, which is about when I started buying the quality real estate investment trust (REIT) in my Tax-Free Savings Account (TFSA). You might know the company, which is formerly known as Fronsac REIT (TSXV:FRO.UN).
I found the top-notch dividend stock when I was going through the Canadian Dividend All-Star List — you can obtain the latest version here. Just to be clear, I’m not affiliated with that website in any way. The author explains the list as “a free spreadsheet with an abundance of useful dividend screening information on Canadian companies that have increased their dividend for five or more years in a row.”
I haven’t found any similar company as Canadian Net REIT on the Canadian exchanges (yet). There are bigger versions of it on the NYSE though, including Realty Income (NYSE:O) and the like.
Why investors ignore this REIT
Many investors might have skipped the name immediately after seeing that Canadian Net REIT trades on the TSXV, is a small-cap with a tiny market cap of only about $130 million, and has low trading volumes.
Interestingly, it’s categorized as a diversified REIT. However, I wouldn’t necessarily group it with diversified REIT H&R REIT (TSX:HR.UN). In fact, most Canadian REITs don’t provide much per-unit growth. Let alone cash distribution growth.
Canadian Net REIT provides extraordinary growth
Canadian Net REIT obviously stands out in this matter. Because of its business model as a net- and management-free lease REIT and its relatively small size, it was able to grow its funds from operations (FFO) per unit at a compound annual growth rate of approximately 19% from 2012 to 2020.
Yes, it raised its FFO per unit by 18% last year during the pandemic, primarily because of its M&A strategy. This translated to dividend growth of about 10% per year from 2012 to 2021, including a 17.4% raise this year! This indicates recent growth has accelerated!
For sure, NET.UN would be in the top-quartile for its growth prospects among Canadian REITs. Its current yield of 4% is not at all bad, especially if you earn the income tax-free in your TFSA.
Bigger income and less work than owning investment properties
According to GlobalPropertyGuide the gross rental yield of residential properties in Canada at the end of January 2019 was about 3.9%, but the net yield is closer to 1.5-2% after taxes, maintenance fees, and other costs.
I’ll admit it’s comparing apples to oranges when comparing an investment in NET.UN versus a residential property. First, NET.UN can be a passive income investment. You simply buy units of the dividend stock and sit on the shares to earn a growing income. The REIT is managed by a professional management team that takes care of mortgages, managing tenants, paying insurance, etc. In contrast, you’ve got to manage your investment properties (or hire someone to do it).
Second, NET.UN is much more diversified with about 84 properties. Moreover, about 59% of its tenants are grocery stores, convenience stores (including some attached to gas stations), and quick-service restaurants, which are resilient to the shift from brick-and-mortar retail to online sales.
Many retail investors don’t have direct access to these types of properties, except through REITs. NET.UN conveniently has a big slice of its portfolio in this wide variety of quality tenants, including Loblaws, Walmart, Sobeys, Suncor, and Tim Hortons.
How’s the Canadian REIT’s valuation?
Canadian Net REIT’s recent equity offering has put a floor on the dividend stock at about $7.45 per unit. I think the bought deal is actually a good sign because it means management sees acquisition or development opportunities.
Assuming a growth rate of 10% for the next couple of years, the Canadian REIT trades at an attractive 2021 valuation of about 13.9.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: As of writing, we own units of NET.UN.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
Get Exclusive Articles from me on Seeking Alpha
- Access my portfolio of high-quality U.S. and Canadian dividend stocks.
- Real-time updates of when I buy or sell from this portfolio.
- Get best ideas of the top 3 dividend stocks from my watchlist. Updated each month.