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.

Key highlights:

• The Company recently raised CAD 600 million via the issue of unsecured debentures. The fund was raised in two tranches which include CAD 300 million of Series V senior unsecured debentures and CAD 300 million of Series W senior unsecured debentures carrying a coupon of 3.192% and 3.648%, respectively.
• The Company announced a monthly dividend distribution of CAD 0.15417 per trust unit, payable on July 15, 2020.

Q1FY20 Financial Highlights: SmartCentres Real Estate Investment declared its quarterly results, wherein revenue stood at CAD 206.73 million as compared to CAD 206.43 million in the previous corresponding period (pcp). Net operating income (NOI) stood at CAD 126.34 million, remained at par with CAD 125.54 million in pcp. Property operating costs stood at CAD 82.90 million, increased slightly from CAD 82.42 million in Q1FY20. The quarter was marked by a lower general and administrative expense and interest expense over the previous corresponding quarter. The Company made a significant loss from fair value adjustment on revaluation of investment properties amounting to CAD 63.38 million, as compared to a profit of CAD 8.89 million in pcp. The Company reported a gain from Fair value adjustment on financial instruments of CAD 38.08 million as compared to a loss of CAD 12.41 million in Q1FY19. Net income and comprehensive income decline to CAD 64.20 million from CAD 79.97 million in Q1FY19. The Company reported higher funds from operations at CAD 96 million, up 8.7% on y-o-y basis driven by the incremental revenue associated with the expansion of the Toronto Premiums Outlets.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price to Earnings based Relative Valuation (illustrative)

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

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

Stock Recommendations: The stock of SRU.UN corrected ~35% and ~40% in the last six months and one year, respectively, due to a decline in the investors' sentiment on account of COVID 19 pandemic. The Group derives 98% of the Trust's revenues from the open-format, outdoor centers which enables customers to practice physical distancing while completing their shopping for everyday needs, which is a key positive. The Company is strategically securing and maintaining all exterior space and is working closely with retailers to set up curbside pickup in order to promote additional onsite economic activity. 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. At the last traded price, the stock is offering a lucrative dividend yield of ~9.05%, which is encouraging from an income investor's point of view. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Crombie Real Estate Investment Trust, First Capital Real Estate Investment Trust etc. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 20.45 as on July 10, 2020.

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

H&R Real Estate Investment Trust

H&R Real Estate Investment Trust (TSX: HR.UN) is a real estate investment trust company and has ownership of properties while engaged in owning and managing real estate portfolio across the North American markets. The major part of the revenue derives from Canadian real estate.

Q1FY20 Financial Highlights: H&R Real Estate Investment announced its quarterly results, wherein the company reported Rentals from investment properties at CAD 279.67 million, lower than CAD 298.68 million in the previous corresponding quarter. The quarter was marked by lower finance costs, a recovery in trust expenses, a significant decline in fair value adjustment on real estate assets amounting CAD 1,301.24 million and a loss on the sale of real estate assets of CAD 1.90 million. Net loss widened to CAD 1,019.82 million, from CAD 1.99 million in the previous corresponding quarter. Funds from operations stood at CAD 136.1 million, at par with CAD 137 million in the previous corresponding quarter. The company reported Net Asset Value (NAV) stood at CAD 22.26 per unit, lower from CAD 25.89 per unit, a year ago.

During the quarter, the company purchased a 50% ownership interest in 93,330 square feet at a price consideration of ~CAD 6.6 million. Further, the company acquired the remaining 49.5% stake in 7575 Brewster Ave., Philadelphia, PA, for at a price consideration of USD 11.6 million. The property was leased to Amazon.com, Inc. and had a remaining lease term of ~11.4 years.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Due to the ongoing pandemic, non-essential businesses are going through challenging times, while people are facing barriers like loss of jobs, salary-cut etc. The above phenomenon is might dampen the rent collection of the Group.

Valuation Methodology: EV to EBITDA based Relative Valuation (illustrative)

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

Stock Recommendation: The stock tumbled ~54% so far this year due to lower investor’s sentiment on account of the weakness within the real estate sector. The company has delayed some of its ongoing projects, to retain its liquidity levels, which is a prudent step. The group has enhanced its liquidity position by securing the access to CAD 425 million via an unsecured line of credit from a syndicate of four Canadian banks. These funds would ensure smooth sailing of the business operations in the coming days. Rent collection within the industrial and multi-residential portfolios stood robust, on account of the better-than-average credit profile of the tenant base across both of these portfolios, which is a key positive. The company has a strong pipeline of projects which includes five residential developments and one mixed-use development. Successful completion of the projects is likely to contribute to the top-line and cash flow. At the last traded price, the stock is offering a dividend yield of 7.2%, which is lucrative considering the current interest rate environment. We have valued the stock using EV/EBITDA multiple based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered Artis Real Estate Investment Trust (TSX: AX.UN), Crombie Real Estate Investment Trust (TSX: CRR) and Choice Properties Real Estate Investment Trust (CHP.UN) etc. as a peer group. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 9.58 on July 10, 2020.

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

*Please be aware that dividends are variable and not guaranteed.

Disclaimer

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