SmartCentres Real Estate Investment Trust

Superior Clientele to Retain High Occupancy Rate: SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is a Canada based real-estate company, which engages in development, leasing and property development of shopping centres, residential rental buildings, retirement homes, office buildings and self-storage facilities. In FY19, the company reported an ownership interest across 150 shopping centres, one office property, six mixed-use properties followed by eight development properties and three other properties etc.

The company has announced a monthly dividend distribution of CAD 0.15417 per share. Meanwhile, in FY19, the dividend payout ratio stood at 85%, up from 77.6% in FY18.

Financial Highlights: For the period ended December 31, 2019, SRU posted top line of CAD 806.41 million, as compared to CAD 790.18 million in FY18. The increase was driven by improved income from investment properties while lower service and other revenues remained a drag. The company reported net income of CAD 374.20 million, as compared to CAD 402.95 million in the previous financial year. The period was marked by lower net income with a fall in margin due to the culmination effect of higher interest expense, lower realization from fair value adjustment on revaluation of investment properties and a loss from the acquisition. The company exited the year with total Leasable Area of 34,337,351 sq. ft., depicting degrowth from 34,379,372sq. ft. from FY18. In-place occupancy rate stood at 98.1%, reflected a marginal improvement of 0.1% from the previous financial year.

FY19 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of SRU.UN is trading at CAD 17.33, with a market capitalization of CAD 2.5 billion. The stock price corrected drastically by 46.64% and 50.37% in the last six months and one year, respectively. The company has delivered a strong CAGR growth of 30.4% in its total assets since 2002. SRU.UN stock has corrected sharply, dropping more than 44% on a year-to-date basis. The enormous decline in the company’s stock presents a good entry point. Notably, the massive decline in SRU.UN stock has led to a juicy dividend yield ratio of 10.68%. Despite near-term challenges, the company remains well positioned to drive growth in the future. The company reported strong occupancy rate for the fourth quarter of FY19. SRU has premium clientele like Walmart, Loblaws, Winners, Marshalls, and Old Navyetc. We believe, it will act as a cushion in retaining high occupancy rate despite tough economic cycle. The business has strong portfolio of leasable properties which is scattered across Canada. The management intends to drive its cash flow through value-added asset management and leasing activity. We have valued the company using P/E based relative valuation method. We have taken peers like First Capital Realty Inc (TSX: FCR.UN), RioCan Real Estate Investment Trust (TSX: REI.UN) and CT Real Estate Investment Trust (TSX: CRT.UN) and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a “Buy” rating on the stock at the Closing market price of CAD 17.33 as on April 1, 2020. 

SRU.UN One-Year Daily Price Chart (Source: Thomson Reuters)

Morguard Corporation

Diversified Portfolio to Provide Stability: Morguard Corporation (TSX: MRC) is a real estate investment company with total assets under management (both owned and under management) of about CAD 21.3 billion (as of December 31, 2019). The company’s diverse portfolio spans across multi-suite residential properties to office, retail, industrial and hotel properties.

The company recently announced a quarterly dividend of CAD 0.15 per share, Moreover, in FY19, the company paid dividend of CAD 0.60 per share.

MRC made three acquisitions in FY19 namely 99 Metcalfe Street, Marquee at Block 37 and Mississauga City Centre at a total price consideration of CAD 320.1 million.

Financial Highlights: For the period ended December 31, 2019, MRC posted revenue of CAD 1,193 million, representing a growth of 3% on y-o-y basis. The increase was driven by improved revenues from real estate and hotel properties. Besides, higher interest & other income further supported the top line growth. However, lower management and advisory fees remained a drag. Net operating income stood at CAD 556.2 million, up 1.5% due to an increase in NOI from acquisition activity net of dispositions completed in previous year. The group reported net income of CAD 155.3 million, as compared to CAD 344.1 million. The decline in net income reflects lower management and advisory fees and higher interest expenses. Higher NOI drove the company’s Funds from operation in FY19. The company’s FFO came in at CAD 250.9 million (CAD 22.23 per share), as compared to CAD 232.4 million (CAD 20.32 per share) in FY18.

FY19 Financial Highlights (Source: Company Reports)

Valuation Methodology: P/E Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation: The stock of MRC is trading at CAD 134 with a market capitalization of CAD 1.51 billion. The stock corrected by 35.27% and 28.53% in the last one month and nine months, respectively. The stock made a sharp recovery and generated a 9.37% return in the last five trading sessions, outperforming the index by 2.77%. In 2019, the company maintained high occupancy levels. . During FY19, occupancy remained consistent across all asset classes, driving stable cash flows. However, the uncertainty following COVID-19 outbreak took a toll on its stock price as investors worry that the company’s occupancy rate could take a hit. While challenges persist in the near-term, we expect the company’s diversified portfolio will help sustaining cash flows in coming quarters. MRC stock is trading a discount when compared to peers. We have valued the company using P/E based relative valuation method. We have taken peers like Canadian Apartment Properties Real Estate Investment Trust (TSX: CAR.UN), Boardwalk Real Estate Investment Trust (TSX: BEI.UN) and Northview Apartment REIT (TSX: NVU.UN) and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 134, up 1.45% as on April 1, 2020.

MRC One-Year Daily Price Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.