PRO Real Estate Investment Trust (TSX: PRV.UN) is a Canada-based open-ended real estate investment trust (REIT). The Company's segments include Retail, Office, Commercial Mixed Use and Industrial. The Company owns a portfolio of diversified commercial real estate properties in Canada and has a focus on primary and secondary markets in Quebec, Atlantic Canada and Ontario with selective expansion into Western Canada (Alberta and British Columbia)

Revenue Mix

Source: Annual Report

Investment Rationale

• Offering a Lucrative Dividend Yield of 9.2%: At the last trading price, the stock was offering a lucrative dividend yield of 9.2%, which is gigantically higher amid lower interest rate environment. Also, the company has a track record of consistent dividend payment. 

• A Solid Track Record of Growth in KPIs – The company is a consistent performer and has solid fundamentals. The company’s total assets grew at a CAGR of 44% (2013-2019), while gross leasable area recorded a CAGR of 50%. The company’s net operating income grew at a CAGR of 78% over the same period.

Source: Company Presentation

• High-quality tenants with long term leases: The company has a diversified tenant profile including an attractive mix of government, national, regional and local tenants as well as a diversified mix of tenants by industry. The REIT’s portfolio lease maturities are well staggered over periods. The management believes that it has fostered strong relationships with its tenants, which is likely to be an important factor in the REIT’s ability to attract tenants to new properties or replace leases as vacancies arise in the REIT’s properties.

Source: Company Presentation

• Well Positioned for Growth and Creating Value: The group is acquiring accretive income-producing commercial properties in strong secondary markets. The group is also focusing on Class B, high-quality commercial real estate and seeking properties with selective development, expansion opportunities and geographical diversification. Further, the company is pursuing off-market opportunities, which is allowing access to the unique pipeline.

• Strong Balance Sheet: The company has a strong balance sheet with a lower cost of debt and an interest coverage ratio of more than 2x. Further, the company has a Staggered mortgage and lease maturity profile and Prudent capital management.

• Risk Associated to Investment: The REIT’s cash flow from operations is dependent upon the rental occupancy levels, the rental rates on its leases, the collectability of rent from its tenants, and recovery of operating costs. Material changes in these factors may adversely affect the REIT’s net cash flows from operating activities and liquidity.

Financial Highlights: 2QFY20

Source: Company filing

Source: Company Presentation

• The number of properties increased to 93 from 84 reported a year before. These properties are located in prime locations within their respective markets, representing a total GLA of 4,580,932 square feet. The increase of 879,800 square feet in GLA compared to June 30, 2019, is a result of the addition of 9 investment properties in the twelve-month period ended June 30, 2020.
• Gross leasable area improved 24% on a YoY basis to 4,580,932 (sq. ft) at the end of the Q2FY20 from 3,701,132 (sq. ft) reported a year-before.
• Occupancy rate improved to 98.1% in the second quarter of FY20 from 97.9% in the same period of the previous financial year.
• Weighted average lease term to maturity years slightly declined to 5.4years from 5.7 years.
• Property revenue improved 27% to CAD 17.2 million and net operating income increased by 16% to CAD 9.8 million.
• Debt to Gross Book value at the end of the Q2FY20 stood at 58.7% against 58.26% reported a year-over period, and the interest coverage ratio stood at 2.8x. Debt Service coverage ratio stood at 1.6x.
• Further, the group’s weighted average interest rate on mortgage debt reduced to 3.72% at the end of Q2FY20, from 3.87% reported a year-over period.
• The group generated Net Cash inflow from operating activities of CAD 0.9 million against an outflow of CAD 0.38 million a year ago.
• Fund from operations surged by 220% to CAD 4.8 million against CAD 1.5 million reported a year ago.
• Adjusted Fund Flow Operations Payout ratio declined to 86.3% from 102.2% in the same period of the corresponding financial period.
• Interest and financing costs were CAD 3.8 million and CAD 7.7 million for the three- and six-month periods ended June 30, 2020. The increase of CAD 0.46 million and CAD 1.126 million over the same periods in 2019 is due to the increase of debt related to the 9 properties acquired throughout the previous twelve months, partially offset by the decrease in the weighted average interest rate on mortgage debt to 3.72% from 3.87%.

Price Performance

1-Year Daily Price Chart (as on September 15, 2020). Source: Kalkine

Top-10 Shareholders

Top-10 shareholders held 6.25% stake in the company, with Lotus Crux REIT, L.P. and Pembroke Management Ltd. are among the major investors with an outstanding position of 3.35% and 1% respectively. Further, the institutional shareholding in the company stood at 2.5% and strategic ownership stood at 3.99%, respectively. Moreover, six out of top-10 shareholders have increased their position over the last six months.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV/Revenue Based Valuation Metrics

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

Peer Comparison

Source: Refinitiv, Thomson Reuters

Stock Recommendation: The group's performance in the second quarter of FY20 was decent, with the main driver for the increase in performance was the nine investment properties acquired in the last twelve months. Further, the REIT's portfolio consisted of 93 properties, located in prime locations within their respective markets, representing a total GLA of 4,580,932 square feet. The company has a diverse tenant base and has a staggered lease maturity profile with no more than 11.8% of base rent maturing in any given period before 2025. Further, the group has decent liquidity, and the management expects to meet all of its obligations as they become due in the short-term and the long-term.

The group is a friend of income investors and consistently distributing the dividend. At the last traded price, the stock was offering a dividend yield of 9.2%, which is encouraging from an income investor's point of view amid a low-interest-rate environment.

However, the recent outbreak of COVID-19 has resulted in voluntary or mandatory building closures, business closures, government restriction on travel and gathering etc. COVID-19 could have a material adverse effect on debt and capital markets, the demand for real estate and the rent payment ability of the tenants.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Speculative Buy" rating at the closing price of CAD 4.89 (on September 15, 2020), with lower double-digit upside potential, based on the NTM Peer's Average EV/Revenue multiple of 9.08x on the FY20E Revenue. We have considered Inovalis Real Estate Investment Trust, Plaza Retail REIT and True North Commercial REIT, etc., as a peer group for the comparison purpose.

*Recommendation is valid at September 16, 2020 price as well.

*Please be aware dividend is variable and not guaranteed.

Disclaimer

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