December 10, 2018

Scott’s Real Estate Investment Trust (SRQ)

The Scott’s Real Estate Investment Trust (SRQ) is perhaps the best kept secret in the Canadian REIT market.  It is currently offering an astounding dividend yield of 13.4% (when you compare this to the returns on bonds right now, the realization of just how substantial this return on investment is, starts to sink in).  Scott’s REIT has achieved success by dominating a unique niche within the Canadian landlord sector.  The trust specializes in small-box retail properties that often have 1-4 tenants.  Scott’s REIT (SRQ) is still fairly small in terms of market capitalization (just over $44 million), but it does have over $270 million worth of assets and its growth record has been outstanding.  Acquisitions remain a top priority as the REIT seeks to grow its unique brand.  As a side note, Scott’s REIT (SRQ) also has the most unique motto among the ones I have analyzed.  It states, “For Scott’s REIT and our unitholders, small-box means BIG returns.”

 

Scott’s REIT has some notable achievements for a trust that has limited assets compared to those of many of its competitors.  Their management has distinguished themselves as far as finding a real estate development model that is extremely sound and profitable.  The trust boasts an occupancy rate of almost 96% and a high return of capital ratio.  Unlike many REITs that are heavily focused in a certain geographic region, Scott’s REIT (SRQ) is located in eight provinces across Canada.  The REIT has attracted many well-known and profitable brands to their banner, including KFC, Taco Bell, Shoppers Drug mart, Rexall Pharma, Laurentian Bank, Tim Hortons, Staples and Subway.  Management estimates that approximately 88% of their properties are located in “desirable primary and secondary markets.”  Their real estate niche has a solid base of tenants in a variety of industries including banks, pharmacies, retail, and restaurants.  This format appears to be very profitable and Scott’s REIT (SRQ) is the only business I have found that concentrates exclusively on this market.

 

The most recent news concerning the real estate investment trust is acquisition of nine retail properties from subsidiaries of the Shoppers Drug Mart Corporation (SC).  The $33 million price tag makes it the largest single transaction is the history of the trust and it represents a solid ongoing relationship with the retail drug store giant.  The acquisition sees the REIT expand by almost 150,000 square feet.  The properties are located in Ontario and Saskatchewan and will all be immediately leased out as Shopper Drug Mart locations.  John Bitoye, the CEO of Scott’s REIT stated, “These retail properties – tenanted by Canada’s popular health, beauty and convenience retailer – are a fantastic addition to our portfolio as we further diversify our tenant base and provide maximum value to our unitholders.”

 

Scott’s REIT (SRQ) is currently listed at $6.35-per share.  This is approximately right in the middle of its 52-week trading range.  I really like the uniqueness of their business model, and I think the trust represents a great way to diversify away from the mega-retail REITs that are currently ruling the Canadian scene.  Even if that lofty dividend ratio is unsustainable, it has plenty of room to scale back and still be extremely competitive.