My Favourite TSX Stock to Buy for Immediate Income

The stock market has options for all types of investors, from those looking for windfall growth to steady income. Before you choose a stock, know what you expect from the money you invest. If you are looking for wind profits, also be prepared to lose the invested money, because high returns come with high risks. And if you’re looking for immediate income, here’s a monthly dividend stock in the commercial real estate area that pays a high dividend.

The current state of the commercial real estate market

The commercial real estate market is in a tight spot. Rising interest rates and a weak business environment have made loans unaffordable. Companies do not renew leases or cancel them altogether. In addition, US commercial real estate debt fell for the first time in two years. And there are signs that delinquencies may be rising on US commercial loans.

This is the scenario in the United States. All these signs are reminiscent of the 2008 subprime crisis when there was a mass default on loans and mortgages. While many property prices fell during that time, Canada survived. Canadian REITs sustained the crisis and rebounded due to tighter banking regulations.

Like the US, Canadian commercial REITs are seeing the first effects of a possible downturn. Many commercial REITs are halving their distributions to keep up with loan payments as tenants vacate or downsize their rental space. Amid the general weakness of the sector, investing in commercial property can be seen as a gamble.

But what if you invest in a REIT that has already crashed and is selling at a great bargain? While I can’t deny that the risk is high, the opportunity for upside is higher. We weigh the risk and rewards to determine if this REIT is worth investing in when the commercial real estate sector is in trouble.

True North Commercial REIT (TSX:TNT.UN) is Canada’s pure play office REIT with 45 properties in seven Canadian provinces. The REIT’s strength is that 80% of its tenants are governments (38%) and companies with high credit ratings (42%). It is not immune to the many challenges of commercial property in the current market environment.

True North’s occupancy rate fell to 91% in the March 2023 quarter (from 96% a year ago) as many tenants did not renew their contracts or reduced their leased space. The REIT halved its distributions in March to maintain a cash balance for debt repayment. These challenges pulled True North Commercial REIT’s stock price down 56% to $2.70. While the price fell faster than its distribution, the distribution yield remained high at 10.84%.

This means, for every $2.70 you get a $0.297 distribution. So if you buy 500 shares for $1,350, you can start earning $12.37/month from September 15 onwards. Your annual payment would be $148, if there were no distribution cuts.

The risk associated with this TSX stock

True North Commercial REIT stock is oversold, indicating that it is closer to its bottom. REITs present an opportunity to double your investment through capital appreciation when the market recovers. Its 10.8% yield (if it holds) can double your investment in less than seven years. That’s a combined increase of 300% when it comes to commercial REITs.

The REIT took on debt at 59.8% of its gross book value. Its 2.8x leverage ratio indicates that the REIT earns an operating profit of 2.8 times its interest expense and can service its debt. It also sold one of its properties, which was 97% vacant, for $17.5 million, bringing in higher liquidity.

Canadian interest rates may stall after July’s rate hike as inflation numbers ease sharply. The bank may keep the rates high for some time before reducing them. The REIT renewed several leases this year and added a new tenant that could keep its occupancy stable and help it maintain high rates.

While it is a risky investment, True North can give you immediate returns. And if things improve for the REIT, there will be significant upside.