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.

Q1FY20 Financial Highlights: SRU.UN posted its quarterly results, wherein revenue stood at CAD 206.73 million, at par with CAD 206.43 million reported in O1FY19. Property operating costs and other increased marginally to CAD 82.90 million, from CAD 82.42 million in pcp. General and administrative expense declined to CAD 5.61 million, as compared to CAD 6.36 million in pcp. Fair value adjustment on revaluation of investment properties reflected a loss of CAD 63.38 million versus a gain of CAD 8.90 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, lower G&A expenses followed by an additional income from PwC-YMCA Tower. The Company reported cash and cash equivalents of CAD 439.46 million, while total assets stood at CAD 10,430.79 million at the end of first quarter of FY20.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks and Uncertainties:

Due to the ongoing lockdown scenario, most of the businesses were closed, particularly which were deemed as non-essentials. Thus, there are chances of a spike in the delay of rent collection, which might take a toll on the near-term cash flow. Further, construction commencement and completion dates of the projects are likely to hamper if the restriction measures are extended for a prolonged period.

Valuation Methodology (Illustrative):  Price/Earnings based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock plunged ~30% so far this year due to a stiff correction in the broader market. The company is focusing on building a robust pipeline of mixed-use development initiatives primarily on underutilized lands, which will enhance future rent collection and ultimately improve both NAV and FFO. Further, the Group collaborated with Greenwin and acquired 1.15 acres on Balliol Street in Toronto’s Yonge and Davisville neighbourhood. The above property opens up a wider scope of business prospects in the coming years. 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 Company has an esteemed clientele list such as Walmart, Loblaws, Shoppers Drug Mart, Canadian Tire, Sobeys, Metro, Dollarama, Rexall, Home Depot, McDonald’s etc., which offers a strong margin of safety and least chances of bad debt due to their strong business model. At the last traded price, the stock closed above the 50-days and 75-days simple moving average of CAD 20.88 and 21.24, respectively, indicating a medium-term bullish trend. The stock made a pull-back rally and appreciated ~17% in the last one month. We have valued the stock using Price/Earnings based relative valuation approach. We have taken peers like First Capital Realty Inc (TSX: FCR.UN), RioCan Real Estate Investment Trust (TSX: REI.UN) and CT Real Estate Investment Trust (TSX: CRT.UN) etc., and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 21.79 as on June 17, 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. The company is engaged in owning and managing real estate portfolio across the North American markets. The major part of the revenue comes from Canadian real estate.

The Group confirmed the issuance of unsecured debentures amounting to CAD 400 million due on June 16, 2025. The proceeds are likely to be used for the repayment of a part of existing debt and general trust purposes.

Q1FY20 Financial Highlights: HR.UN declared its quarterly results, wherein the company reported a revenue of CAD 279.7 million, marginally lower from CAD 298.7 million in Q1FY19. Property operating income slide to CAD 140.6 million from CAD 153.8 million in Q1FY19, due to lower top-line performance, partially supported by lower property operating cost. The company reported a significant gain from Fair value adjustment on financial instruments amounting CAD 145.50 million, as compared to a loss of CAD 7.46 million in the previous corresponding period. Net loss stood at CAD 1,019.8 million, against a loss of CAD 2 million in pcp, driven by a loss on fair value adjustment on real estate amounting to CAD 1,301 million. Funds from operations (FFO) remained flat at CAD 136.1 million from CAD 137 million in Q1FY19. NAV stood at CAD 22.26, reflecting a decline from CAD 25.89 in pcp. The company exited the period with total assets of CAD 13,443.96 million and cash and cash equivalent of CAD 52.75 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: Prolong lockdown of non-essential business would hinder the construction activity, and the company would fail to complete the construction of the projects in a timely manner. Thus, the delay would take a near-term toll on the top-line and cash flow of the company. Further, extended lockdown coupled with higher unemployment rate might result in a delay in rent collection, which is a setback for the business.

Valuation Methodology (Illustrative):  EV/EBITDA based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months 

Stock Recommendation: The stock of HRU.Un soared ~23% in the last one month after a sharp correction of ~50% so far, this yar. The stock has closed above its 50-days and 75-days simple moving average of CAD 9.76 and CAD 10.81, respectively, indicating a medium-term bullish trend. 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. Notably, the company has reinvested into high-quality residential and industrial properties, including new developments, across high-growth markets like Toronto, New York, Miami, San Francisco and Los Angeles which would retain the investment income of the company. Further, to preserve the cash flow, the Group has postponed certain construction based on priority. The stock provides a lucrative dividend yield of 6.6% on an annualized basis, which is likely to appeal to a large number of investors. 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 closing market price of CAD 10.49 as on June 17, 2020.

HR.UN Daily Technical Chart (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.