True North: Similarities to Slate, Inovalis and Dream (TSX:TNT.UN:CA)

Note: All values ​​are in Canadian dollars

It’s there

True Northern Commercial Real Estate Investment Trust (OTC:TUERF)(TSX:TNT.UN:CA) owns a portfolio of 41 office properties. here they are They are located across Canada, in the provinces of British Columbia, Alberta, Ontario, New Brunswick, and Nova Scotia.

At the end of Q1, True North had 44 properties, 3 of which (Ontario) have since been sold. Cumulatively, the properties have a 90% occupancy rate and are predominantly occupied by government and credit-rated tenants. This real estate investment trust’s portfolio currently spans 4.7 million square feet of gross leasable area and is valued at approximately $1.3 billion.

This REIT pays out 2.475 cents per month, and at the current trading price of $8.61, the yield is about 3.45%.

Advance coverage

We’ve got Q4 2024 covered results Fairly recently He gave this REIT a Neutral rating. Falling occupancy, adjusted funds from operations, or AFFO, astronomical leverage, rising interest costs and tightening coverage all played a role in our outlook for True North at the time.

This company just lost a major tenant in Calgary, Alberta, and we were expecting 12x debt to EBITDA sooner rather than later. True North was selling assets to mitigate this, but we felt the risks would exceed deleveraging measures, so we remained on the sidelines. We noted that H&R REIT (OTCPK:HRUFF)(HR.UN:CA) was our preferred REIT for those interested in playing the office recovery. Although it didn’t make its unit holders rich, H&R has held up well against its protagonist ever since.

Today we’ll review our first-quarter results and see if the metrics are trending in the direction we envisioned.

First quarter 2024

The best part of the shift from Q4 2023 to Q1 2024 is that occupancy levels have not deteriorated further. At the end of the quarter, we were at 90.1%, which was slightly higher than the 89.2% we saw at the end of 2023.

However, one thing to keep in mind is that there is a lot of asset turnover that occurs and this can distort the delta in occupancy levels. We actually got more sales after the first quarter of 2024 as well.

True North Commercial Real Estate Investment Trust (“REIT”) is pleased to announce that it has completed the sale of two office properties for a total sales price of $18.0 million (excluding transaction costs) totaling 70,700 square feet located at 251 Arvin Avenue, Hamilton, Ontario (“ Arvin Estate”) and 6865 Century Avenue, Mississauga, Ontario (“Century Estate”). In addition, to the previously announced unconditional sale of 135 Hunter Street East, Hamilton, Ontario (“Hunter Property”) for a sale price of $6.4 million and expected to close on or about April 22, 2024, the real estate investment trust has entered into an agreement Unconditional purchase and sale agreement to dispose of 9200 Glenlyon Parkway, Burnaby, British Columbia (“Glenlyon Property”) for a sale price of $37.0 million and is expected to close on or about June 27, 2024. The four dispositions are in progress and were sold for a total sales price of $61.4 million, which is higher than their initial total price of $56.8 million and above the IFRS value as of December 31, 2023. The sales will generate net proceeds of approximately $19.1 million, which The real estate investment trust intends to use it to repay the current amounts. Indebtedness on its credit facilities.

Source: True North.

As cool as that sounds, it does nothing to change the basic thesis. The REIT will sell what it can sell in today’s markets. This is not necessarily a reflection of where you will sell the rest of the portfolio. Selling better properties will also significantly reduce funds from operations (“FFO”) over time. You can see that in total net operating income (“NOI”), FFO, and adjusted FFO for Q1 2024. The latter two metrics were in the lower double digits.

The REIT has continued to use buybacks in exchange for distributions, with the stock trading at a significant discount to IFRS NAV.

Prospects

Let’s start with Slate Office REIT (OTC:SLTTF)(SOT.UN:CA). We got some pushback when we said it was going to zero, and the biggest argument was the discount to NAV. If you like it at 60% of NAV, you should get a second mortgage to buy it today.

That was a joke, of course. This company is still headed to zero in our view and likely won’t be able to in the next 12 months.

Inovalis REIT (OTC:IVREF)(INO.UN:CA) is another fund, although there’s a slightly better chance this one will get a little left over for shareholders.

True North is undoubtedly miles ahead of the other two in some aspects. Occupancy levels are the critical difference. Both Slate and Inovalis saw a real decline in occupancy levels in 2023. To the extent that True North can keep that ratio above 85%, there is a fighting chance. It will be an uphill battle with a weighted average lease term of 4.4 years.

This does not mean, of course, that there are significant returns to be made, even if True North succeeds. The other critical metrics are deep in the orange zone, if not the red zone. Debt to gross book value is 62.1%. This is despite selling a lot of assets. Interest coverage declined further in the quarter. The weighted average duration to maturity is just 2.78 years.

Just put your bullish views aside and read the refinancing rate the REIT earned this quarter (emphasis added).

During the quarter, the REIT refinanced $12,946 of mortgage loans at a weighted average fixed interest rate of $12,946. 7.41% One-year term which represents approximately 16% of mortgages due during the year with the majority of remaining debt maturities at the end of 2024 occurring on loans with large Canadian financial institutions with strong REIT and Starlight relationships.

Source: True North Financials.

There is approximately $300 million due over the next 1.75 years (measured as of the end of March 2024).

These mortgages are at a low rate of 3.4%. Assuming we see similar rates for refinancing, you should see a reduction in foreign financing of just 30-40% based on that. This may happen even if occupancy remains constant, which we doubt.

Judgment

It looks cheap based on IFRS NAV.

We don’t think these properties as a whole can be offloaded at anywhere near this price. We didn’t believe it for Slate, and we didn’t believe it for Inovalis. Likewise, we don’t believe that for Dream Office (OTC:DRETF)(D.UN:CA) either. Besides that, you have the Nation of Islam at about $66 million (16.58 million x 4).

This supports debt approaching $800 million. You generally don’t want to be dancing with debt at 12.5 times EBITDA levels in a distressed asset class. They rarely succeed. Both Slate and Inovalis reached similar levels before declining. Dream Office is flirting with 11X. We remain skeptical that there is value in True North Commercial Real Estate Investment Trust, and so far, since our dividend warning, in January 2023, the stock is down 76%.

We owned three of these four at some point and all came out in 2021. We haven’t looked back. There are many beaten-down REITs that are not experiencing the same headwinds. We would look at them for value and stay away from True North.

Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.