H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (is a Canada-based open-ended real estate investment trust that owns, operates and develops commercial and residential properties across Canada and the United States. Its segments include Office, Retail, Industrial and Residential.

Key Highlights 

• An Income Play: The group continues with the track record of dividend payment. The company announced a monthly dividend of CAD 0.058 per unit payable on 6th January 2021, with a record date of 21st December 2020. At the last closing price, the stock was offering a dividend yield of 5.153%, which is lucrative considering the current interest rate environment.

• Robust Rent collection: High-quality and long-term leased office portfolio, helped the group deriving substantial rent collection. The group's 85.3% of revenue comes from investment-grade rated tenants, helping in achieving an overall rent collection of 95% in October, compared to 93% in Q3 2020 and 90% in Q2 2020.

Source: Company 

• Increase in cash from operations: Cash flows from operations increased by CAD 24.1 million in Q3 2020 compared to the Q3 2019 period, primarily due to healthy rent collection along with an increase in non-cash working capital and lower finance costs, which was partially offset by a higher provision for bad debts.

Source: Company 

• A healthy balance sheet with ample liquidity: The group has liquidity of CAD 1.0 billion under unused borrowing capacity along with CAD 54.4 million of cash on hand and an unencumbered asset pool of approximately CAD 3.5 billion as on 30th September 2020. 

Financial overview of Q3 2020 (In CAD)

Source: Company 

• In Q3 2020 the Group's reported rental income stood at CAD 271.6 million compared to CAD 281.6 million in Q3 2019. The decline was mainly due to net disposition activity over the previous 21 months.
• Same-Asset property operating income in Q3 2020 also declined to CAD 176.2 million compared to CAD 186.5 million in the previous corresponding period, due to provision for bad debts taken as a result of the impact of COVID-19, which predominantly impacted the Group's retail segment.
• The Group reported Net income of CAD 247.8 million, increased by CAD 178.5 million, as against CAD 69.3 million in Q3 2019, primarily due to fair value adjustments on real estate assets and financial instruments. 

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection; hence any fluctuation in these would affect the group’s performance. Other risks include government regulation and oversight changes, changes in consumer preferences, competition from other players, and general economic conditions. 

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation 

The company has a resilient business model and reported impressive rent collection at 93% in Q3 2020, and 95% in October, which is the first month of the upcoming Q4 2020. The group has well-diversified tenant base with total assets of approximately CAD 13.3 billion at September 30, 2020. Soon the group's River Landing project, an urban in-fill mixed-use development site in Miami, Florida would be fully operational. We expect an improvement in the rent collection and a decline in provisions, which would further support the company's overall performance. Therefore, based on the above rationale and valuation, we have given a "BUY" rating at the closing price of CAD 13.39 on December 29, 2020. We have considered SmartCentres Real Estate Investment Trust, Dream Office Real Estate Investment Trust, Allied Properties Real Estate Investment Trust, etc. as the comparison's peer group. 

Source: Refinitiv (Thomson Reuters)

Smart Centres Real Estate Investment Trust

Smart Centres Real Estate Investment Trust (TSX: SRU.UN) is one of Canada’s largest fully integrated REITs, with a best-in-class portfolio featuring 166 strategically located properties in communities across the country.  The group has CAD10.4 billion in assets and owns over 34.2 million square feet of income producing value-oriented retail across Canada.

Key highlights

• An Income Play: The group continues with a track record of dividend payment. The company announced a monthly dividend of CAD 0.15417 per unit payable on 15th January 2021, with a record date of 31st December 2020. At the last closing price, the stock was offering a dividend yield of 7.971%, which is lucrative considering the current interest rate environment.

• Robust Rent collection: Most of the real estate companies witnessed a slide in the rent collection during the first half of FY2020, due to the ongoing pandemic, which resulted in job losses and lower consumer income. With a gradual revival of the economy and the opening of trade relations across the major countries, the company has witnessed a recovery in the overall rental space, which is a key positive. We expect the momentum to continue in the coming days, which would support the Company’s cash flows.

Source: Company

• Ample liquidity: The group has total liquidity of CAD 1.16 billion from Cash resources and operating line accordion, along with unencumbered asset pool of approximately CAD 5.8 billion as on 30th September 2020.

Source: Company 

Financial overview of Q3 2020 (in thousands of Canadian dollars)

Source: Company

• In Q3 2020, the company posted net rental income of CAD 113.1 million compared to CAD 126.5 million in the previous corresponding period. The low net rental income was primarily due to the impact of COVID-19 and high property operating cost. 
• In the reported quarter, the group marked higher G&A expenses, which stood at CAD 7.6 million, compared to CAD 4.6 million in pcp and higher Interest expenses of CAD 37.5 million against CAD 33.9 million pcp.
• The group reported Net Income of CAD 111 million in Q3 2020, compared to CAD 95.1 million in the previous corresponding period, primarily due to earnings from equity-accounted investments for CAD 33.8 million. 

Risks associated with investment

The Company's revenue and Operating results depend significantly on the occupancy levels and rent collection. Any fluctuation in occupancy rate or rent collection would hamper the performance. Other risks include government regulation and oversight changes, changes in consumer preferences, competition from other players. The most significant contributor to the group's rental income is Walmart, which alone contributes 25%. Dependency on a single player to this extend might be a risk. 

Valuation Methodology (Illustrative): Price to Earnings

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

Stock recommendation

The company witnessed an improvement in the monthly rent collection in the recent past which is promising. The group hold a decent project pipeline, which is likely to support future cash flows. We also expect further improvement in the group's performance due to the gradual lifting of restrictions related to COVID-19. Further, the stock is offering a healthy dividend yield of more than 7%, which is encouraging from the investor's point of view. Therefore, based on the above rationale and valuation done using the above methodology, we have given a "BUY" rating at the closing price of CAD 23.21 as on December 29, 2020. We have considered Choice Properties Real Estate Investment Trust, Dream Office Real Estate Investment Trust, First Capital Real Estate Investment Trust, etc., as the comparison's peer group.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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