BTB Real Estate Investment Trust (TSX: BTB.UN) is a Canada-based unincorporated, open-ended real estate trust. It is formed and governed under the laws of the Province of Québec pursuant to a trust agreement. BTB began its real estate operations on October 3, 2006, and as of September 30, 2020, it owns 64 retail, office and industrial properties located in primary markets of the Provinces of Québec and Ontario. Since its inception, BTB has become an important property owner in the province of Québec and in Eastern Ontario. BTB’s management is entirely internalized, and no service agreements or asset management agreements are in force between BTB and its officers. 

Business Segment

Source: Annual Report

Investment Rationale 

• An Income Play: BTB shares are yielding higher on TSX with a dividend yield of 7.87%. The yield is significantly higher than the TSX Composite median yield of 3.3% and Canada 10-Year dividend yield of 1.127%. BTB has a consistent record of dividend payment over the past ten years, regardless of the business cycle. As the company witnesses some blow because of COVID-19 pandemic, despite that the company has maintained its dividend payment which reflects the financial strength of the company. Given the lower interest rate environment, the company’s consistent track record of dividend payment along with lucrative dividend yield would bring the stock into the investors’ limelight. We believe that the company is well-positioned to cater to income-seeking investors as finding an adequate risk-adjusted nominal interest rate is quite tough amid times when there is so much liquidity entering the market through central banks.

Dividend History: Source: Refinitiv (Thomson Reuters)

• Diversified Asset Base: The diversified asset bases has significantly protected the group’s business model during the COVID-19 pandemic, despite the company witnessed some blow in the retail portfolio. Further, in the office and industrial properties, tenants have been definitively less impacted. The group mentioned that their Ottawa portfolio continues its stellar performance as the group were able to collect almost 100% of the contractual rents for the period and no tenants within this portfolio made claims under the CECRA program.

Source: Company Filing.

• Robust Margin Profile: The group maintained a robust margin profile over the past several quarters, which shows the operational resiliency of the group. Investors should note that despite the COVID-19 pandemic, the group was to maintain its margin profile, which is noteworthy. 

Source: Refinitiv (Thomson Reuters)

• Strong quarterly Performance: The company recorded yet another strong performance for a second consecutive quarter plagued by the pandemic. Notably, FFO payout ratio stands at 68.6% for the quarter and 93.4% for the year to date and AFFO payout ratio stands at 77.4% for the quarter and 105.2% for the year to date, showing a notable improvement. Further, The CECRA Program has ended on September 30th, 2020 and BTB filed grant applications for approximately 80 tenants, occupying spaces in 24 of its properties. The total monetary value of their CECRA filings was CAD 1.9 million, payable by two levels of government. The sums payable by the federal government have almost all been collected. The estimated net financial impact of the CECRA program on BTB’s 2020 income is approximately CAD 0.4 million.

• Stock Hovering in a Bullish Zone: At the last closing, shares of BTB traded well above the crucial long-term as well as short-term support levels of 200-day, 100-day, 50-day, 30-day, 20-day, 10-day and 5-day SMAs, which implies a strong uptrend in the stock. Moreover, at the last closing, the Price/200-day SMA ratio of BTB stood at 1.15x, implies that the stock is hovering approximately 15% above the long-term support level, which is typically considered a long-term bullish trend in the stock. Also, the Moving Average Convergence Divergence (MACD) is rising and hovering above 9-day SMA signal line, with the difference between short-length 12-day and long-length 26-day EMAs is positive. This is another bullish indicator.

Technical Chart (as on February 16^th, 2021). Source: Refinitiv (Thomson Reuters)

• Strong Relative Outperformance: Shares of BTB are outperforming the benchmark index over the past six months, 3-Month, and 1-Month. BTB shares reported a relative outperformance of 7.3% in the past six-months, 7% in the past 3-months and 6.7% in a month over period. This reflects a relative strength in the BTB shares. Further, a price hovering above long-term as well short-term support zone, indicates that the strength is expected to continue as well.

Source: Refinitiv (Thomson Reuters)

• Risk Associate to Investment: The COVID-19 pandemic has particularly affected some tenants, notably in the retail segment. The Trust has supported some of these tenants by granting rent deferrals. The Trust recognizes, however, that there is a risk associated with the recovery of rent deferrals and with tenants who have a balance outstanding at the end of the deferral period. Further, any fluctuation in occupancy rate would affect the group’s overall performance.

Financial Highlights: Q3FY20

Source: Company Filing

• In the third quarter of 2020, BTB’s rental revenue decreased by CAD 0.4 million or 1.6% compared to the same quarter last year.
• BTB recorded a decrease in operating expenses of CAD 222, or 2.1%, between the third quarter of 2019 and the third quarter of 2020, resulting from the lower level of activity from tenants in office properties.
• As a percentage of rental revenue, operating expenses for the third quarter of 2020 decreased by 0.2% to 43.6%, compared to 43.8% for the third quarter of 2019, and decreased by 0.6% for the cumulative nine-month period, to 45.4%
• Properties acquired during the past 12 months contributed to an increase of CAD 0.5 million in net operating income, and the shortfall resulting from the dispositions that took place during the same period is evaluated at CAD 0.6 million. Total net operating income (NOI) decreased by CAD 168 or 1.2% between the third quarter of 2019 and the third quarter of 2020.
• Interest expense decreased by CAD 327 during the third quarter of 2020 compared to the same period of 2019, and by CAD 121 for the cumulative period, mainly due to the net effect of acquisitions, dispositions and decrease in the prime rate impacting floating interest rates of mortgages in recent quarter.
• In the third quarter of 2020, 14.1% of total distributions (2019: 13.0%) were reinvested under the DRIP. An amount of CAD 2.197 million (2019: CAD 2.316 million) of the Trust’s cash has thereby been preserved through payment of distributions in units of the Trust since the beginning of the year.
• For the third quarter of 2020, recurring FFO increased by 0.9%, and was 10.9¢ per unit, compared to 10.8¢ per unit in 2019. The recurring FFO payout ratio decreased by 29.4% for the third quarter of 2020 and stood at 68.6% compared to 97.2% for the same quarter of 2019. The improvement compared to the prior quarters of this year is principally the result of normalized revenues, limited credit losses and the reduction of the distribution to unitholders.
• The Trust presented total distributions in excess of net cash flows from operating activities (IFRS) net of interest paid of CAD 2.360 million during the quarter ended September 30, 2020. The surplus distributions resulted from the seasonality of activities for the period, specifically winter expenses and property taxes, most of which are paid in the first six months of the year but mostly recovered from tenants over a 12-month period.
• Total debt ratio lower from 61.4% in September quarter of 2019 to 59.7% in the September quarter of 2020.
• Interest coverage ratio also improved to 2.38 times at the end of September quarter of 2020 as compared to 2.27x reported at the end of the same quarter of the previous year. 

Shareholding Pattern

Top-10 shareholders highlighted in the below table together holds approximately 3.05% stake in the company. Léonard, Michel and Dimensional Fund Advisors, L.P. are top major shareholder in the company holding stake above 4% each. Further, the institutional ownership in the company stood at 1.21% and strategic ownership stood at 0.86% respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation Metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: Over the years, BTB has fueled its growth through high-quality property acquisitions based on its selection criteria, while maintaining an appropriate allocation among four investment segments: office, retail, industrial and mixed-use properties.  Further, the group’s performance is quite decent in the third quarter led by diversified asset portfolio that minimizes the company’s risk. The company recorded yet another strong performance for a second consecutive quarter plagued by the pandemic. Notably, the company’s FFO payout ratio stands at 68.6% for the quarter and 93.4% for the year to date and our AFFO payout ratio stands at 77.4% for the quarter and 105.2% for the year to date, showing a notable improvement.

However, the company is still carrying financial consequences related to the CECRA program as their metrics have been affected by special charges and four announced bankruptcies. Had these events not occurred, their NOI would have shown an increase of 1.9% compared to the same quarter last year and SPNOI would have increased by 4.3%.

In the office and industrial properties, the company’s tenants have been definitively less impacted. Also, the company noted that their Ottawa portfolio continues its stellar performance as they were able to collect almost 100% of their contractual rents for the period and no tenants within this portfolio made claims under the CECRA program. Further, the company is offering a lucrative dividend yield of ~7.4%, which is significantly higher given the lower interest rate environment, together with a consistent track record of dividend payment over the past 10-years.

From the technical standpoint, its shares are also hovering in bullish territory with strong relative strength against the broader TSX Composite Index. This implies that the stock is carrying the potential to move up from the current price level.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 3.81 on February 16, 2021.

1-Year Price Chart (as on February 16^th, 2021). Source: Refinitive (Thomson Reuters)

*Recommendation is valid at February 17, 2021 price as well.

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