Canadian Net REIT’s strategy to acquire commercial real estate that is under the radar of most of its competitors appears to be paying off, its 2023 year-end financial results indicate.

"Despite the challenges faced in the real estate market throughout 2023, Canadian Net maintained its strong performance," president and CEO Kevin Henley said as the Montreal-based REIT released its 2023 fourth-quarter results on March 19.

Canadian Net (NET-UN-X) says it concentrates on an “unexploited real estate niche in Canada,” with deal sizes that are under the radar of large REITs and institutions, but too large for individual investors.

It has 98 properties in Eastern Canada with $308 million in total assets and 1.45 million square feet of gross leasable area.

The REIT specializes in single-tenant, essential services properties with good access, visibility and high traffic, and boasts a 100 per cent occupancy rate. Tenants are primarily comprised of groceries, service stations and c-store chains and quick service restaurants.

Properties are mostly in Quebec and Ontario (61 per cent and 25.5 per cent respectively, as of June 30), and Nova Scotia and New Brunswick (13 per cent and 0.5 per cent).

Canadian Net REIT's Q4 results

Rental income for the quarter ended Dec. 31, 2023 was $7.2 million, an increase of 2.8 per cent from the same quarter in 2022. 

For the 12 months ended Dec. 31, 2023, rental income was $26.6 million, a 7.4 per cent increase from the same period in 2022. Net operating income was $19.4 million, 5.8 per cent higher than a year earlier, primarily reflecting the year-over-year increase in rental income and partially offset by property sales.

During an earnings call on March 20, Henley told analysts the REIT’s goal in 2024 is “mostly to position ourselves better as we see more and more deals coming to market.”

However, given that the transactional market continues to be quiet due to interest rate volatility, “our goal continues to be to recycle capital and optimize the REIT’s balance sheet, positioning ourselves to seize opportunities as they arise.”

Canadian Net sold three properties last year, including a single-tenant Pizza Hut property in Dartmouth, N.S., for $1.65 million and a Mike’s restaurant in Trois-Rivières, Que., for $1.3 million.

“We’re always disposing of assets on an opportunistic basis as long as it’s accretive,” he told analysts. "(Doing so) allows us to redeploy capital.” More dispositions are expected this year.

Analyst upgrades Canadian NET to "buy"

Canaccord Genuity analyst Zachary Weisbrod upgraded Canadian Net from a "hold" to a "buy" after the fourth-quarter results were released.

"Our investment thesis is based on the fact that the REIT owns a stable portfolio leased to necessity-based tenants on triple-net-leases resulting in steady cash flow,” Weisbrod wrote in a note.

“Further, fundamentals are healthy, in our view, which should lead to steady rent growth. The REIT operates with a conservative payout ratio, allowing for retained capital to fund growth, and is currently trading at an attractive valuation.”

Formerly known as Fronsac REIT, the trust changed its name in June 2021. 

According to the REIT, its business model leads to lean overhead with virtually no cap ex.

Canadian Net REIT leases properties on a triple-net lease basis, so tenants incur maintenance costs, property taxes and insurance expenses. The REIT says this results in more stable and predictable cash flows and that overhead does not increase with new acquisitions.

It also incurs no management expenses and the trust can afford to pay increasing distributions as soon as it consolidates acquisitions. The REIT also has significant insider ownership, currently about 15 per cent.

The REIT leases primarily to credit-rated national tenants. Its top five tenants, representing 62 per cent of all tenants, are Loblaws (18 per cent), Walmart (14 per cent), Metro (12 per cent), Sobeys (12 per cent) and Suncor (six per cent).

REIT renews all 2023 lease expiries

During the earnings call, Henley said the REIT concentrated its Q4 2023 efforts on lease renewals, refinancing and property dispositions. 

All leases expiring in 2023 were renewed during the quarter and most 2024 lease renewals were completed during 2023, he said. Twelve leases were up for renewal in 2024, representing around $1.7 million in NOI, and only two remain to be renewed. 

Henley, who has been with the REIT for seven years, became president and CEO last year. He was formerly Canadian Net’s chief investment officer.

Canadian Net officials did not immediately respond to a request from RENX to be interviewed for this article.