InterRent REIT

InterRent REIT (TSX: IIP.UN) is a growth-oriented real estate investment trust, which sustainable distribution through the acquisition and ownership of multi-residential properties.

Recently, the company announced the launch of an extensive new cleaning and safety program named CLV Clean & Secure + ^TM . The program builds on the company’s existing practices as well as their strong maintenance and customer service reputation in the multi-residential housing space.

Q2FY20 Financial Highlights: The group declared its quarterly results, wherein the company reported gross rental revenue of CAD 39.3 million, indicating a growth of 14.4% on y-o-y basis. Operating revenues, during the quarter stood at CAD 39.004 million, as compared to CAD 34.742 million recorded in the previous corresponding period (pcp). This growth was underpinned by 6.6% growth from the same property portfolio. On the flip side, the business reported a 230-bps y-o-y fall in the occupancy level of the overall portfolio at 93%. Net Operating Income stood at CAD 24.839 million, up 7.8% on y-o-y basis. The quarter was marked by 260 basis points fall in the NOI margin from the previous corresponding quarter to 63.7%, primarily attributable to the inclusion of ~CAD 0.9 million of expenses related to COVID-19 pandemic. The business witnessed a fair value gain on investment properties amounting CAD 16.0 million driven by improved property operations. Net income was reported at CAD 22.714 million, as compared to CAD 36.795 million, due to a higher non-cash fair value loss on unit-based liabilities and Class B unit liability. The company posted its Funds from Operations (FFO) at CAD 1.8 million, reflecting a growth of 13.7% on y-o-y basis.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: On account of a sluggish real estate demand, the performance of the company might hinder owing to a lower occupancy level and a fair value loss on investment properties.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: The stock of IIP.UN tumbled ~23% so far this year. Due to the prevailing economic cycle, the real estate sector witnessed a tepid response and various real estate companies have struggled with cash inflows due to a higher unemployment rate and lower consumer spending. However, InterRent REIT has collected more than 99% of April, May and June residential rents and reported the same trend for the month of July 2020, which is impressive. The company has a defensive portfolio, which is evident from the recent rent collection. On the liquidity front, the company has access to a credit facility of CAD 182 million and an additional 50 million available under revolving term loan facilities, which seems sufficient to withstand the current operating environment. In addition to this the company’s cash balance stood at CAD 112.8 million. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Residential & Commercial REITs) median on NTM basis. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 11.99 on October 19, 2020.

IIP.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 October 15, 2020.

Q2FY20 Financial Highlights: The group declared its second-quarter results, wherein the company posted Net rental income and other at CAD 105.638 million, as compared to CAD 125.782 million in Q2FY19. The decline was primarily due to a lower rental from investment properties coupled with an increase in the property operating cost. The quarter was marked by a surge in the general and administrative expense and higher earnings from equity-accounted investments. Due to a significant fall in the property rates on account of sluggish operating environment, most of the real-estate companies faced significant setbacks, and subsequent to that, the company recorded a CAD 197.364 million as loss from fair value adjustment on revaluation of investment properties during the quarter, as compared to an income of CAD 4.015 million in the previous corresponding quarter (pcp).  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.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  Fall in real estate prices on account of a lower demand scenario might hinder the company’s overall performance. Several businesses under ‘non-essentials’ category have closed their operations, while further restrictions from the state Governments would dampen the company’s growth prospects.

Stock Recommendation: The stock of SRU.UN fell ~34% so far this year due to a weak macro outlook. The company posted industry-leading occupancy levels of ~97.8% at the end of Q2FY20, which is impressive. The company has a premium client base, and companies like Walmart has increased its total rental area in the recent past due to added traction within the retail space. The company’s partnership with the leading names in the retail space is likely to help in generating stable income in the challenging operating environment. The group has a higher margin of safety as most of the occupants belongs to the essentials business category. Further, despite the challenging operating environment, the group continue with the dividend distribution, which is encouraging from an income investor’s standpoint. At the last traded price, the stock was offering a dividend yield of 9.0%. The stock of SRU.UN is available at a lower valuation compared to the industry. The stock was trading at a P/E multiple of 11.5x on Next Twelve months basis (NTM), as compared to the industry (Residential & Commercial REITS) of 15.4x. The stock carries an attractive dividend yield of 8.972% on an annualized basis, would attract several income investors. Considering the aforesaid facts, current trading levels, occupancy levels, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 20.55 on October 19, 2020.

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

Disclaimer

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