H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is principally involved in the ownership of properties in Canada, and the U.S. H&R owns and manages a real estate property which is located in the Canadian provinces of Ontario and Alberta and in the U.S.

Event Update: The group would disclose its fourth quarter FY20 results on February 11, 2020. 

Key Highlights:

• Issuance of CAD 250 million of Unsecured Debenture: Recently, the group announced the issuance of senior unsecured debenture amounting CAD 250 million. The net proceeds would be used for the repayment of outstanding indebtedness and for general trust purposes.
• Decrease in debt-component: Despite the current economic downturn, the group has reported a decline in debt component at CAD 6,278.568 million, from CAD 6,375.860 million in FY19, which is encouraging. The decline in the debt profile is likely to lower its finance costs in the coming days, which would support the company’s profitability. Further, the group reported lower finance costs of CAD 171.994 million in Q3FY20, significantly lower than CAD 195.389 million, a year ago.
• An income Play: Over the years, the company reported a stable dividend payment across economic cycles, which indicates operational resiliency, consistent cash flows etc. At the last closing price, the stock was offering a dividend yield of ~5.468%, higher than the yield of TSX Composite of ~3.35%.
• Impressive Sequential Performance: The group retained its operational resiliency and posted higher gross margin and EBITDA margin of 64.7% and 62.9%, respectively, improved from 60.6% and 58.4% in Q2FY20, which is commendable, looking at the current economic downturn.

Q3FY20 Financial Highlights:

• The group announced its quarterly results, wherein the group posted its revenue of CAD 271.612 million, as compared to CAD 281.571 million in the previous corresponding period (pcp). The decline was due to a lower contribution from rental income (CAD 220.988 million versus CAD 225.887 million in pcp) and a slide in revenue from services (CAD 48.595 million versus CAD 54.881 million in pcp).
• Net income was reported at CAD 247.849 million, significantly higher than CAD 69.301 million in Q3FY19, driven by a gain from fair value adjustment on real estate assets of CAD 93.00 million, as compared to a loss of CAD 25.258 million in pcp. Moreover, lower finance costs of CAD 56.894 million, as compared to CAD 64.216 million in Q3FY19 supported the bottom line.
• The group posted cash and cash equivalents amounting CAD 54.436 million, while total assets were recorded at CAD 13,293.967 million.

Q3FY20 Income Statement Highlights (Source: Company Reports).

Risk: The group performance is related to the current economic conditions and a fall in demand for real estate coupled with decline real estate prices, would dampen the company’s occupancy rate and profitability.

Valuation Methodology (Illustrative): P/E based

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

Stock Recommendation: The company reported improvement in financials on a sequential quarter basis, and lowered balance sheet risk by reducing debt proportion in capital mix.  The stock of HR.UN appreciated ~30% and ~45% in the last six months and nine months, respectively and closed above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Also, the company is offering decent yield from the income investor standpoint. 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 First Capital Real Estate Investment Trust, Allied Properties Real Estate Investment Trust etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 12.24 on January 26^th, 2021.

 1-Year Price Chart (as on January 26^th, 2021). Source: Refintiv (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 CAD 10.4 billion in assets and owns over 34.2 million square feet of income producing value-oriented retail across Canada.

Event update: The Company will declare its financial results for the three months and year ending 31^st December 2020, on 10^th February 2021.

Key highlights

• An Income Play: The group continues with a track record of dividend distribution despite this challenging environment; this shows its financial strength and suggests that it is a friend of income investors. The company announced a monthly dividend of CAD 0.15417 per unit payable on 16th February 2021, with a record date of 29th January 2021. The stock offers a dividend yield of 7.651% at the last closing price, 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. With a gradual revival in the economic activities, the Company witnessed a recovery in in the rent collection, which is encouraging. The momentum is expected to continue in the coming days, which would support the Company’s cash flows.

Source: Company

• Solid tenant base:From approximately 166 properties at crucial intersections across Canada, the Company derives industry-leading occupancy rate of 97.4%, while 60% of tenants are under essential services providers. Almost 25% of the total revenue is derived from Walmart alone. 

• A healthy balance sheet with ample liquidity: The group has total liquidity of CAD 1.17 billion from Cash resources and operating line accordion, along with unencumbered asset pool of approximately CAD 5.8 billion as on 30th September 2020. All these stats reflect a glimpse of good financial stability.

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 113.18 million compared to CAD 126.48 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 the pcp and higher Interest expenses of CAD 37.5 million against CAD 33.9 million in 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. Hence, fluctuations in occupancy levels and business volumes would affect the financial performance. The most significant contributor to the group's rental income is Walmart, which alone contributes 25%. Dependency on a single player to this extent 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. Furthermore, the group offers a healthy dividend yield of more than 7%, which is encouraging from an income investor's perspective. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 24.18 on January 26, 2021. We have considered First Capital Real Estate Investment Trust, CT Real Estate Investment Trust, RioCan Real Estate Investment Trust, etc., as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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