Plaza Retail REIT (TSX: PLZ.UN) is a Canada-based open-ended real estate investment trust.

Pros:

• Higher occupancy rate at 95.7%
• Offering a lucrative dividend yield of 7.84%, significantly higher given the lower interest rate environment and with a track record of consistent dividend payment.
• Group’s portfolio is composed largely of essential needs retail, which has performed well since the start of the pandemic. 98% of these stores are now open for business.
• Plaza maintains a prudent cash distribution policy, in order to retain sufficient funds to manage the business, including ongoing maintenance capital expenditures and debt service.

Cons

• Debt increased in the first half of 2020 on YoY basis, and Debt/Equity ratio stood at 1.63x, with a relatively lower interest coverage ratio of 2.26, vs industry median of 2.85
• LTM ROE of 6.2% is lower than the industry average of 7.6%.
• The COVID-19 pandemic has had and will continue to have a material impact on Plaza’s business and Plaza’s tenants, the full extent and duration of which is uncertain at this time.
• Free Cash Flow Yield of 2% is significantly lower than the industry average 12%.

2QFY20 Financial Result

• For the three months ended June 30, 2020, AFFO decreased by CAD 427 thousand, or 5.7% over the prior year and AFFO per unit decreased 5.6% over the prior year.
• The Trust recorded a loss for the three months ended June 30, 2020 of CAD 31.3 million compared to a profit of CAD 17.0 million for the same period in the prior year. The decrease was mainly due to a decrease in the fair value of investment properties of CAD 28.6 million as compared to a fair value increase of CAD 11.5 million in the prior year.
• Finance costs for the three months ended June 30, 2020 were CAD 7.2 million, compared to CAD 7.4 million for the same period in the prior year.
• At June 30, 2020, overall committed occupancy for the portfolio (excluding properties under development, redevelopment, and non-consolidated investments) was 95.9% compared to 96.5% at June 30, 2019.

Risk: The group might face a delay or default in rent collection amid challenging operating environment driven by COVID-19.

Valuation Methodology (Illustrative) – EV to EBITDA based Valuation

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

Stock Recommendation: The group’s performance was impacted in the second quarter of the FY20, with Adjusted FFO decreased by CAD 427 thousand, or 5.7% and recorded a loss for the three months of CAD 31.3 million compared to a profit of CAD 17.0 million for the same period in the prior year.

Further, from the technical analysis standpoint, stock Is hovering below its long-term crucial support level of 200-day SMA. Also, MACD Is falling with the difference between 12-day and 26-day EMA is negative.

Therefore, based on the above rationale and valuation, we have given an “Avoid” recommendation at the closing price of CAD 3.57 on September 28, 2020.

1-Year Price Chart (as on September 28, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

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