True North Commercial Real Estate Investment Trust (TNT.UN)
Ah, real estate. Commercial real estate, specifically, might be in some trouble.
The “work from home” trend seems to be hitting in an entirely predictable way, with companies realizing that they don’t need as much real estate if employees are working from home half the time. They are giving up floors and buildings, and employees are not upset.
As a result, there seems to be a surplus of office real estate at the moment. Some say it’s overvalued. So the question is, HOW overvalued is it? And is it possible there are some real estate investments that are undervalued?
It might be possible.
Today, I read a news story about a company I had invested in years ago – True North Commercial Real Estate (TNT-UN.TO). It’s been many years, but they used to pay a decent dividend of 6% back when interest rates were almost 0%. I held that for a year or so and got out of it. I can’t remember why I sold it.
Announced this morning, TNT is pausing its dividend for six months and using that money instead to buy back its stock. Is that a desperate action? It may be.
However, the company management makes a compelling argument. They value their commercial real estate property (minus mortgages) at around $4.97 per share. And the stock was trading at around $1.40. So, there is a massive discount to net asset value.
This stock has been trading for 30% of its book value. The market is pricing in quite a drop in value!
Let’s consider the possibility. The company has already written down the value of their properties by 10% this year. The company’s real estate may be STILL overvalued. What if the real estate is worth another 10% less than they calculate?
As of Sept 30, 2023, the fund has $1.33 billion of assets on the books. There are 94 million units outstanding, which makes the net asset value $4.97.
Can they write down another $130 million off of that? I guess they could! The fund has about $463.8 million of equity at the current time, so taking that down to $330 million would be a big hit. That’s a 29% reduction!
The company used to pay $2.3 million monthly in distributions, but those are paused for the next six months. Instead, it will buy back stock with that money. At current prices, that is 1.76 million shares per month removed from the market. After six months, there could be up to 10 million fewer shares.
So, if you take off another theoretical $330 million of equity and divide by the theoretical 84 million shares after the buyback, you get a net asset value of $3.92.
But the stock is currently valued at $1.32!
So even with another 10% drop in real estate value, that only takes $1 off the NAV. And the stock is still undervalued!
It’s cash flow profitable, and the occupancy rate is north of 90%. Only one building appears to be very empty.
Anyways, I’m convinced. Today, I bought a decent number of shares.
TNT is down 83% in the past two years. Ouch.
I’m not buying it for the dividend. But I think the stock could be an “easy” double in the next two years. That’s a purely speculative play.
I think commercial real estate might be in some trouble still, but I don’t think *this* particular high-quality commercial real estate is in trouble.
