Slate Office REIT 

Slate Office REIT (TSX: SOT.UN) is a Canada based open-ended real estate investment trust which focuses on acquiring, holding, developing, maintaining, improving, leasing, managing or otherwise dealing with office properties in Canada. The REIT's portfolio consists of approximately 34 commercial properties located in Canada.

Key highlights 

• An Income Play: The group continues with a healthy record of dividend payment. Recently, it announced a monthly dividend of CAD 0.0333 per unit payable on April 15, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 8.96%, which is decent considering the current interest rate dynamics. This would attract several investors looking for a consistent income stream. 

• Stable income: Despite the challenging environment, the REIT collected a market-leading 96% to 98% of the rent in cash each month. These substantial cash rent collections are a function of the portfolio’s resilient tenancies, comprised of 60% government or credit-rated tenants. 

• Increased Liquidity: The company reported improved liquidity of CAD 54.765 million in FY20, compared to CAD 37.238 million in FY19. The current liquidity level includes a cash balance of CAD 8.520 million and undrawn revolving facilities of CAD 46.245 million, which seems sufficient to meet its business objectives and commitments.

Source: Company 

• Improved indebtedness ratio: The REIT's indebtedness ratio on December 31, 2020, was 58.0% which is lower by 71 basis points compared to December 31, 2019. The management's medium-term target is to maintain total indebtedness at approximately 55%.

Source: Company 

Financial overview

Source: Company 

• For FY2020, the company posted rental revenue at CAD 183.58 million, reflecting a decline of 14.8% on y-o-y basis. The decline was primarily due to a significantly lower income from Canada segment.
• Net operating income stood at CAD 91.5 million, lower than CAD 103.0 million in FY19. The decline was primarily due to lower revenue, partially offset by lower property operating expenses (CAD 97.6 million versus CAD 114.8 million in FY19).
• Adjusted EBITDA was recorded at CAD 87.1 million, as compared to CAD 98.9 million in FY19.
• The company reported a net income of CAD 13.6 million, lower than CAD 62.4 million in FY19. 

Risks associated with investment

Due to the current economic slowdown, the group reported a slide in its occupancy rate at 84.2% in Q4FY20, lower from 85.4% in Q3FY20. Continuation of such trend would affect the group’s revenue. 

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

From April 2020 to December 2020, the group witnessed an encouraging rent collection within the range of 96% to 98%, despite the ongoing challenges led by the COVID-19 pandemic. Also, despite a relatively lower occupancy, the company reported cash from operations at CAD 46.450 million in FY20, slightly lower than CAD 49.296 million in FY19, which reflects company is prudently managing its costs to bolster the cash position. Moreover, the stock is offering a lucrative dividend yield amid a low-interest rate environment, which is encouraging from an income investor’s standpoint. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 4.46 on April 7, 2021. We have considered Dream Industrial REIT, Plaza Retail REIT, Artis REIT as the peer group for the comparison.

1-Year Price Chart (as on April 7, 2021). Source: Refinitiv (Thomson Reuters)

Medical Facilities Corporation

Medical Facilities Corporation (TSX: DR) owns a diverse portfolio of surgical facilities in the United States. The group owns controlling interest across four specialty surgical hospitals and six ambulatory surgery centers, which are in Arkansas, Oklahoma, South Dakota and in California.

Key Updates:

• Stable Dividend Payment: Over the years, the company reported a consistent dividend payment, backed by stable cash flow generation. At the last closing price, the stock was offering a dividend yield of ~3.9%, which is decent considering the current interest rate scenario.

• Favorable Demographics: As the demography of USA is more inclined towards elderly population i.e., 65+ years and the count is going to increase in the coming years, it is expected that the need for healthcare services and facilities will increase, which would be beneficial for the company.

Source: Company

• Expansion strategy: Recently, the company announced the expansion program at Arkansas Surgical Hospital, which spread around ~4,590 sq. ft. to add two operating rooms and three new recovery beds in its post-anesthesia care unit. The project is expected to complete by the end of FY21. This expansion project would allow access of more patients mainly in the specialty care, which is highly efficient with high quality service.

Q4FY20 Financial Highlights:

• DR announced its quarterly result, wherein the company posted total revenue of USD 109.483 million, down 3.9% on y-o-y basis.
• The group reported an operating expense of USD 87.882 million, slightly lower than USD 88.068 million in Q4FY19. This decrease was attributed to lower drugs and supplies cost (USD 34.895 million v/s USD 36.188 million in pcp) partly offset by higher salaries and administrative expenses.
• Income from operations stood at USD 21.601 million, v/s USD 25.886 million in pcp. Meanwhile, the group reported an adjusted EBITDA of USD 28.421 million, down 13.1% on y-o-y basis.
• Net income stood at USD 5.616 million versus USD 30.780 million in Q4FY19. The decline was majorly due to a loss from change in value of exchangeable interest liability amounting to USD 13.534 million as compared to an income of USD 14.584 million in pcp.
• The group reported cash and cash equivalents of USD 66.182 million, while total assets were recorded at USD 456.996 million.

Q4FY20 Income Statement Highlights (Source: Company Report)

Risks: Due to any restrictions imposed by the Federal Government, the group might witness a hindrance in its Facilities, which might take a toll on the overall performance. Also, the rising cost of drugs may put downward pressure to the facilities operating margins.

Stock Recommendation:

The company has a diverse portfolio of highly rated, high-quality facilities and is focused on a scalable platform for growth via organically and through acquisitions. Moreover, the long-term dynamics remains positive, driven by the increasing average age and life expectancy, growing US population and advancement in science and technology. On the valuation front, the stock is trading at a forward EV to sales multiple of 0.9x, which is lower than the industry (Healthcare Providers & Services) median of 2.2x. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of DR at the closing price of CAD 7.25 on April 07, 2021.

One-Year Price Chart (as on April 07, 2021). Source: Refinitiv (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.