RioCan Real Estate Investment Trust

Riocan Real Estate Investment Trust (TSX: REI.UN) is a Canadian real estate investment trust which owns, develops, and operates Canada’s portfolio of retail-focused, increasingly mixed-use properties. 

Event Update:

The company reported that it would disclose its fourth quarter FY20 results on February 11, 2020.

Key Highlights

• Strong Bullish Technical Indicators: From the moving average standpoint, at the last closing price its shares have traded well above the all-support levels of 50-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs and EMAs, which implies that the share is hovering in a strong bullish zone. Further, the MACD is rising and hovering above 9-day SMAs signal line, implies strong upside momentum in the stocks, with the difference between short-length and long-length 12-day and 26-day EMAs is positive, another bullish indicator. Moreover, 14-day and 9-day RSI is hovering in neutral zone and tilted more towards the overbought territory.
• An Income Play: Shares of RioCan REIT offering a lucrative dividend yield of 8.17%, which is gigantically higher, given the lower interest rate environment. The group has a decent track record of consistent dividend payment over the past 10-Years. The RioCan dividend yield is approximately 2.6x of the TSX Composite dividend yield of 3.3% and 10x of the Canada 10-Year Government Bond Yield of 0.85% respectively.

10-Year Dividend History. Source: Refinitiv (Thomson Reuters).

• Improving Performance on Sequential Quarter Basis: The company reported significant financial improvement in the third quarter of FY20, with a positive number on the operating level against an operating loss reported in the previous quarter, led by 12% improvement in revenue to CAD 302.3 million against CAD 269.9 million reported a quarter before, and 13% jump in the gross profit on a sequential quarte basis. The company reported significant improvement in operating income led by ~71% reduction in the total operating expenses. 

Q3FY20 Financial Highlights:

• The group declared its quarterly results, wherein the company reported revenue of CAD 302.335 million, as compared to CAD 353.877 million in the previous corresponding period (pcp). The decline was primarily due to a significantly lower income from Residential inventory segment (CAD 28.491 million versus CAD 73.767 million in Q3FY19). However, a stable rental revenue (CAD 266.402 million versus CAD 272.141 million in pcp) supported the top line.
• Total operating costs were reported at CAD 126.499 million, stood lower than CAD 161.117 million in Q3FY19. The decline was due to a significantly lower cost from Residential inventory cost of sales segment.
• REI posted its operating income of CAD 175.836 million, lower than CAD 192.760 million in Q3FY19. The decrease was due to a lower income, partially supported by lower operating expenses.
• Net income stood at CAD 117.559 million, as compared to CAD 177.554 million in Q3FY19.
• REI posted cash and cash equivalent of CAD 59.930 million, while total assets stood at CAD 15,127.844 million.                     

Q3FY20 Income Statement Highlights (Source: Company Reports) 

Risks: The company is exposed to occupancy risk, and lower rent collection may affect financial performance. Further, the company is exposed to weakness in the broader economic conditions. Also, the next wave of the covid-19 outbreak could dent the group’s performance in the coming time.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

The corporation reported an improved rent collection at ~94% in Q3FY20, higher from ~91% in Q3FY19, which is encouraging, looking at the current scenario. Moreover, the company has a strong retention ratio of its tenants (improved to 88.4% in Q3FY20, from 83.1% in Q1FY20) and has comparatively lower exposure for Retail Tenants, which acted as a savior during lockdown period. The company’s assets are strategically located and derive 90% of its annualized revenue from six major markets which have a dense population base, along with higher strong household incomes. The stock carries an attractive dividend yield of more than 8%, significantly higher than the yield of TSX Composite of ~3.33%. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a lower-double-digit upside (in percentage terms). For the said purposes, we have considered peers like Crombie Real Estate Investment Trust, SmartCentres Real Estate Investment Trustetc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 17.63 on January 14, 2021.

REI Daily Technical Chart (as on January 14^th, 2021). Source: Refinitiv (Thomson Reuters)

Timbercreek Financial Corp

Timbercreek Financial Corp (TSX: TF), is a Canada-based non-banking commercial real estate lender which provides shorter-duration, customized financing solutions to professional real estate investors.

Key highlights

• Executive Appointments: Recently, the group made some executive-level changes, where they appointed a new Chief Executive Officer and new Chief Financial Officer. Blair Tamblyn, Chief Executive Officer and Co-Founder of Timbercreek Asset Management and Chairman of Timbercreek Financial, has been appointed Chief Executive Officer of the Company, replacing Cameron Goodnough, effective November 13, 2020 and Tracy Johnston, CPA, CA, has joined as the new Chief Financial Officer, replacing Gigi Wong, effective November 13, 2020. 

• An income play:The Company has a strong history of dividend distribution, which establishes the fact that the company’s business is resilient and has reported stable cash flows over the years. Recently the group declared a monthly cash dividend of CAD 0.0575 per common share with a record date of December 31, 2020. At the last closing price, the stock was offering an impressive dividend yield of 8.03%, which is lucrative amid a low interest rate environment.

Source: Company

• Well balanced portfolio: The company’s business is not concentrated on one product-line or any specific geography; this is a crucial aspect and offers excellent diversification. The group has 84.1% of income-producing properties and 50.1% multi-residential assets in a basket that provides stable and secure returns and helping the group amidst the current challenging time.

Source: Company 

• Enhancing financial flexibility:The Company executed two initiatives to strengthen its financial flexibility. The first initiative was the pursuance of CAD 20.0 million in shares buy-back at an accretive price of CAD 8.05 per share under Normal Course Issuer's Bid ("NCIB"). Secondly, the Company repaid CAD 45.8 million of 5.4% convertible debentures utilizing the existing credit facility. The credit facility was also re-negotiated to the current size of CAD 535.0 million.

Financial overview of Q3 2020 (In thousands of CAD)

Source: Company

• In Q3 2020, Net investment income decreased by CAD 0.6 million to CAD 24.06 million against 24.7 million in Q3 2019, primarily attributable to a negative fair value adjustment of CAD 0.6 million on a mortgage investment.
• Income from operations decreased by CAD 1.1 million, to CAD 20.2 million in Q3 2020, compared to CAD 21.3 million in Q3 2019.
• In Q3 2020, the group's net income stood at CAD 14.4 million, compared to CAD 13.9 million in the previous corresponding period, primarily due to a decrease in financing cost on credit facilities. 

Risk associated with investment

The company is exposed to various risks that include changes in government regulation and oversight, changes in consumer preferences, fluctuations in occupancy levels and business volumes, competition from other players, and general economic conditions.

Valuation Methodology (Illustrative): Price to Book Value

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

Stock recommendation

The group is a well-diversified group with mortgage investments of approximately CAD 1.1 billion, along with Cash of CAD 69 million. The group has a resilient business model which reported impressive rent collection at the rate of 99.6% in October 2020. It reflects a remarkable domestic recovery followed by strong creditworthiness and the improved financial capacity of the borrowers. Furthermore, the stock is carrying an impressive dividend yield of around 8%, which translates in an essential factor for regular income-seeking investors with a long-term horizon.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 8.59 on January 14, 2021. We have considered Equitable Group Inc, Home Capital Group Inc, Atrium Mortgage Investment Corp, etc. as the peer group for comparison.

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.