H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is one of Canada’s leading REITs with total assets of and is engaged in owning and managing of real estate portfolio including industrial, retail, office, and residential properties across North American market. The Company derives the majority of its income from the Canadian properties while H&R's offices contribute to most of its total revenue.

Q2FY20 Financial Highlights: H&R Real Estate announced its second-quarterly results, wherein the Company reported a rental income of CAD 269.9 million, lower than CAD 287 million recorded in the previous corresponding period (pcp). The decline was mainly due to the net disposition activity over the past 18 months. Property operating income stood at CAD 163.6 million, against CAD 187.1 million in Q2FY20. The Company reported a 3.8%, 7.2% and 15.3% y-o-y growth within the office, industrial and residential segments. Net income plunged to CAD 35.8 million against CAD 109.6 million in pcp, on account of an extended loss from fair value adjustment on real estate assets amounting CAD 57.7 million as against a loss of CAD 27.3 million in pcp coupled with an increase in the provision for bad debts. The Company posted lower funds from operations at CAD 115 million against CAD 128.2 million in pcp. Net Asset Value (NAV) per unit, during the quarter stood at CAD 21.80, as compared to CAD 25.81 in Q2FY19.

Q2FY20 Financial Highlights (Source: Company Reports)

Key Risks: Due to the current economic slowdown, the company might witness setbacks in the rent collection, which might dampen the overall performance of the company.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: Despite a slowdown in the economy, the company has performed relatively well and has reported ~91% and ~87% rent collection during the month of July and August 2020. The company has high-quality, long-term leased office portfolio and approximately ~87% of the tenants are investment-grade, which offers a higher margin of safety. With the gradual re-opening of the non-essential stores, the company's performance is likely to improve during the second half of FY20. The company is constructing five residential properties and one mixed-used property and has an ongoing development of in River Landing, an urban in-fill mixed-use development site in Miami, comprising ~1,000 feet of waterfront on the Miami River. The above product-line is expected to deliver improved business prospects in the coming days. The CECRA program for small businesses, by Government of Canada, is offering forgivable loans to qualifying landlords to cover 50% of five monthly rent payments, which would support the tenants and indirectly the group's business. With the gradual recovery of the economy, we expect an improvement in the rent collection along with a decline in the provisions, which would further support the overall performance of the company. Further, at the last traded price, the stock was offering a dividend yield of ~6.55%, which is encouraging from the income investors' point of view. 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 peers like Artis Real Estate Investment Trust, Boardwalk Real Estate Investment Trust etc. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 10.53 on September 16, 2020.

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

SmartCentres Real Estate Investment Trust

SmartCentres Real Estate Investment Trust (TSX: SRU.UN) is a Canada based real-estate company, which engages in development, leasing and property development of shopping centres, residential rental buildings, retirement homes, office buildings and self-storage facilities.

Recently, the Management has declared a monthly of CAD 0.15417 per trust unit, paid on September 15, 2020.

Q2FY20 Financial Highlights: SmartCentres announced its quarterly results, wherein the company reported Net rental income and other of CAD 105.638 million as compared to CAD 125.782 million in the previous corresponding period (pcp). The decline was due to a lower rental from investment properties combined with a higher property operating cost. The company reported higher general and administrative expense and higher earnings from equity-accounted investments. Meanwhile, the group witnessed a drastic fall in the property rates due to a demand destruction scenario across the rea-estate industry, and the company recorded a loss from fair value adjustment on revaluation of investment properties at CAD 197.364 million, against an income of CAD 4.015 million in Q2FY19.  Net loss and comprehensive loss stood at CAD 133.674 million as compared to a profit of CAD 95.513 million in pcp. Cash and cash equivalents stood at CAD 532.078 million, while total assets were posted at CAD 10,382.902 million. The company reported cash flows provided by operating activities at CAD 125.511 million, lower than CAD 133.349 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The group might witness headwinds from lower rent collection due to the closure of several non-essential businesses, which may dampen the cash flow of the company.

Valuation Methodology: P/E Based Relative Valuation (Illustrative)

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

Stock Recommendation: The company has delivered a good operating performance and posted total occupancy rate at ~97.8%, which is commendable looking at the current operating environment. The company recorded a loss from the fair value on revaluation of investment properties, due to the decline in the property rate on account of lower demand in the recent past. With the gradual increase in demand, we believe the real estate industry to be benefitted, which would support the property prices as well. The company has a strong clientele base and helps consumers and residents to find preferred locations for its retail, office and residential tenants. The company has a strong relationship with industry-leading retailer Walmart and has partnership across 115 locations with full grocery and pharmacy, which is expected to lead to a stable rent in the coming days. Further, around 60% of the rental revenue comes from tenants who are offering 'essential services' and are opened fully or partially, ensuring stable cash flows for the business. Furthermore, the stock carries a healthy dividend yield of ~8.49% on an annualized basis, which is impressive looking at the current interest rate scenario. We have valued the stock using the P/E multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (In percentage terms). We have taken peers like First Capital Real Estate Investment Trust, RioCan Real Estate Investment Trust etc. for the purpose. Hence, considering the aforementioned facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 21.79 on 16 September 2020

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

Disclaimer

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