Chartwell Retirement Residences

Chartwell Retirement Residences (TSX: CSH.UN) is an open-ended real estate trust which indirectly owns and offers a wide range of seniors housing communities, from independent supportive living through assisted living to long term care.

The company announced a cash distribution of CAD 0.051 per Trust Unit, payable on September 15, 2020

Q2FY20 Financial Highlights: Chartwell Retirement Residences announced its second quarter results, wherein the company posted improved revenue of CAD 230.653 million, as compared to CAD 227.438 million in the previous corresponding period (pcp). The improvement was aided by higher income from Resident and Lease revenue from joint ventures. Direct property operating expenses increased by 5.7% on y-o-y basis, due to higher expenses on account of COVID-19, acquisitions and developments, and pre-leasing and higher operating costs, coupled with higher costs related to the property portfolio, partially offset by lower repairs and maintenance and marketing expenses. Losses before income taxes stood at CAD 3.888 million, as compared to a profit of CAD 0.056 million in pcp. Net loss and comprehensive loss stood at CAD 1.931 million, as compared to CAD 1.583 million in pcp. The higher net loss was primarily due to an increase in the direct property operating cost and finance costs, partially supported by a deferred income tax benefit.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The business might face hindrance in the occupancy rate due to a slowdown in the economy, along with a decline in the fair value of the properties.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The CSH stock corrected ~24% so far this year amid volatility in the equity market. During the quarter, the group’s revenue increased marginally amid a challenging time. However, the funds from operations stood at CAD 39.0 million, lower than CAD 47.1 million in the previous corresponding quarter, primarily due to an increase in the expense related to the pandemic, added compensation expense and increase in the finance costs etc. We believe the above expenses are temporary in nature and are likely to decline in the coming days, which would support the group’s margin in the coming days. The pace of decline in occupancy has slowed since the onset of the pandemic in mid-March, with move-in activity steadily increasing and in July representing approximately 65% of previous-year volumes and moveout activity continuing to be below previous-year levels. The group’s tenant credit quality remains strong, given the typical investment profile of Canadian seniors in our target customer demographic. Substantially all June and July rent and service charges have been collected, consistent with the past trend. The group has liquidity amounted to CAD 408.8 million, which included CAD 82.8 million of cash and cash equivalents and CAD 326 million of available borrowing capacity on our credit facilities, which seems to be enough to meet the near term requirements. The stock made a sharp recovery and was up by ~11% in the last three months and outperformed the benchmark index. Despite the challenging operating environment, the group continued with the dividend distribution. At the last traded price, the stock was offering a dividend yield of 5.8%, which is lucrative considering the current interest rate environment. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered NorthWest Healthcare Properties REIT, SmartCentres Real Estate Investment Trust and Canadian Apartment Properties Real Estate Investment Trust etc., as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 10.56 on September 10, 2020.

CSH. UN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

RioCan Real Estate Investment Trust Trust

RioCan Real Estate Investment Trust (TSX: REI_U) is a leading real estate investment trusts company, which owns, manages and develops retail-focused, increasingly mixed-use properties located in prime, high-density transit-oriented areas. The company operates with 221 properties with an ~38.6 million square feet area comprised of office, residential rental and 15 development properties.

Key Highlights:

• The company announced the sale of 50% interests two of its properties in Toronto and Ottawa to Maplelands Development Inc. The group realized CAD 32.6 million from the above transactions.
• The Management announced a monthly distribution of 12 cents per unit, payable on September 08, 2020.

Q2FY20 Financial Highlights: The group declared its second-quarter results, wherein the company posted revenue of CAD 269.893 million as compared to CAD 327.574 million in the previous corresponding quarter. The decline was majorly attributable to significantly lower revenue from residential inventory sales along with a decline in property management and other service fees. Rental revenue also declined to CAD 264.463 million against CAD 272.374 million in the previous corresponding period (pcp). Operating income stood at CAD 155.539 million as compared to CAD 190.317 million in pcp. The decline was due to a significant fall in income, which was partially offset by lower operating costs. The quarter was marked by significantly higher fair value losses on investment properties which came in at CAD 451.707 million, as compared to a gain of CAD 120.824 million in pcp. The fair value losses were due to an estimated effect of the pandemic on property cash flows and capitalization rates coupled with the negative impact from the depressed oil and gas market. Net loss, during the quarter, stood at CAD 350.77 million as compared to CAD 252.972 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: COVID-19 has resulted in the closure of non-essential businesses. Though the government has allowed the reopening of non-essential businesses, a further breakout of COVID-19 might result in the closure of such businesses again. Any such scenario might result in delay or default in rent collection for the group, which would hamper the group’s financials.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company reported committed occupancy rate at the retail market at 96.9%. Trust achieved approximately 109,000 square feet of new leases during the quarter across several tenants like grocers, specialty retailers to essential and regular personal services. The company reported average net rent per square foot for the new leases at CAD 25.83, higher than the Trust's commercial portfolio average net rent of CAD 19.75 per square foot, which is encouraging. For the quarter, the renewal retention ratio increased to 89.4%, 630 basis points increase from Q1 2020 despite the COVID-19 pandemic. The blended leasing spread for major markets trended higher at 7.3%, improving 80 basis points from Q1 2020. Within the residential space, the company expects a revival during the second part of FY20, which augurs well for improved occupancy rate. The company took prudent strategies, like reducing operational expenses, deferring municipal taxes etc. to support its near-term working capital. The stock tumbled ~44% in the last one year and trading near the lower band of its 52-week trading range of CAD 27.92 and CAD 12.41. Despite the challenging operating environment, the group continue to distribute a dividend, which is encouraging from an income investor's point of view. At the last traded price, the stock was offering a dividend yield of 9.69%, which is lucrative considering the current interest rate environment. We have valued the stock using P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like SmartCentres Real Estate Investment Trust, CT Real Estate Investment Trust etc. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 14.53 on September 10, 2020.

REI.UN Daily Technical Chart (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.