European Residential REIT

European Residential REIT (TSX: ERE.UN) is a publicly traded unincorporated, open-ended REIT focused on aggregating a portfolio of high quality, multi-residential real estate assets in key European markets with solid fundamentals. Its initial focus is on the Netherland.

Key Highlights

• Improving operating matrix:  Despite the concerns about the impact of an increase in instances of the Delta form of the coronavirus on growth, the REIT improved its operating matrix, which is commendable. Its operating revenue In Q2 2021, increased 9% to € 18.7 million against € 17.2 million in the previous corresponding period, while NOI margin also improved by 2% to 78.2% and FFO rose 13% to € 8.6 million.

• Healthy occupancy: The REIT's commercial property occupancy remained steady at 100.0% as of June 30, 2021, while residential property occupancy fell to 98.0% in the reporting period, compared to 98.8% as of June 30, 2020. However, the REITs freshly purchased newly constructed property is responsible for 26% of residential vacancies.
• Substantial presence in high growth urban markets: The company has a significant presence in urban areas, as well as a proven track record of high rental growth. As a result, we anticipate substantial cash flow growth in the future quarters. The average monthly rent of multi-residential units climbed to € 865 in Q2 2021, up from € 832 in the previous quarter.

Source: Company 

• Acquired two multi-residential properties: The REIT has announced the purchase of two multi-residential buildings in the Netherlands. The first property is 98% leased at an occupied Average Monthly Rent of €922, while the second property in Amsterdam has 33 residential units. We feel, the acquisition would complement and add value to the current asset portfolio.
• An income play: The group continues with a healthy track record of dividend distribution. Recently, the company announced a monthly dividend of €0.00917 per unit payable on September 15, 2021. Moreover, the stock offers a dividend yield of 3.435%, which looks decent considering the current interest rate environment.
  

Financial overview of Q2 2021 (In thousands of €)

Source: Company

• In Q2 2021, the REIT posted its operating revenues at € 18.74 million, comparatively higher than € 17.24 million in the previous corresponding period. The increase is primarily due to accretive acquisitions and higher AMR on the stabilized portfolio.
• Net Rental Income stood at € 14.65 million v/s € 13.14 million in the previous corresponding period.
• The REIT reported an income before tax of € 37.93 million compared to a loss of € 33.96 million in pcp, primarily due to net movement in the fair value of investment properties.
• Net income stood at € 27.99 million, against a net loss of € 35.85 million in the previous corresponding period.
  

Risks associated with investment

Change in consumer preferences of relocating from city centers to suburbs would lead to lower demand from the urban areas, which might be a key concern as the group derives a substantial portion of its revenue from the urban region.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company reported strong operating results in Q2 2021, fuelled by accretive acquisitions and ongoing strong rental growth, with a 4% increase in Stabilized Occupied AMR along with 9% improved operating revenues at €18.7 million. The occupancy for residential and commercial properties remained stable at 98% and 100.0%, respectively. The REIT also collected residential rental revenue consistently, which is in line with its historical average, that provided healthy cash flows. Furthermore, the multi-residential asset class in Europe seems resilient and highly defensive, indicates stable cash flow generation. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 4.73 on September 15, 2021. We have considered Killam Apartment REIT, Boardwalk REIT, Artis REIT etc as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 15, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Delta 9 Cannabis Inc 

Delta 9 Cannabis Inc (TSX: DN), is a Canada-based company engaged in Biotechnology & Medical Research. The principal activities of the Company are the production, storage and sale of medical marijuana.

Key highlights 

• Partnered with Cultivatd Inc.: Cultivatd Inc. recently collaborated with the firm, which would help to boost future sales in its B2B Grow Pod business in Canada and the United States. Furthermore, we anticipate that in the next years, the B2B and equipment product sales in the US market will present a substantial growth potential.
• Increasing retail stores: The organization is making steady strides against its target of opening up to 20 Delta 9 Cannabis specialty stores throughout the Prairie provinces this year and has a long-term vision of opening many more Delta 9 branded retail stores across Canada. The group also announced the grand opening of three more cannabis retail stores since the beginning of 2021 and now have 12 retail stores in total with nine in Manitoba, two in Alberta and one in Saskatchewan.
• Focusing on medical cannabis market: A tiny percentage of the company's revenue comes from selling medicinal cannabis products directly to individuals who have gotten a medical document from their doctor. The company's recent addition of oils and extract products to its product portfolio is expected to result in increased income streams and a greater value proposition for medical clients, according to management.
• Opportunity from recreational cannabis market: The domestic recreational cannabis market, according to management, represents a significant growth prospect for the company in the coming years. Wholesale revenues of recreational cannabis products are projected to account for a significant portion of the Company's overall income. Management has entered into a number of important supplier agreements in order to achieve growth in this sector.
  

Financial overview of Q2 2021 (in CAD)

Source: Company 

• In Q2 2021, the company reported higher revenue at CAD 16.7 million compared to CAD 13.0 million in the previous corresponding period. The rise was due to solid performance in its all-business segments.
• On an account of increase in % cost of sales to revenue at 71% V/s 69% and after accounting for changes in the fair value of biological assets, the gross profit declined to CAD 4.8 million in Q2 2021, compared to CAD 5.1 million in pcp.
• In the reported period the company’s operating expenses increased marginally to CAD 5.6 million against CAD 5.3 million in pcp, as a result the group posted loss from operations of CAD 0.8 million against CAD 0.1 million in pcp.
• Primarily due to above stated reasons along with higher finance cost, the company posted net loss of CAD 1.1 million in Q2 2021 against CAD 0.4 million in pcp.
  

Risks associated with investment

Several risk factors could impact the Company’s ability to execute its key strategies successfully and materially affect future events and financial performance. To name some of these risks are reliance on licenses and authorization, disruption in the supply chain, inability to sustain pricing and inventory models, etc. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

Recently, the company presented its Q2 2021 financial numbers, with record top line revenues and it was seventh consecutive quarter of positive Adjusted EBITDA. The group would continue its expansion within the retail store chain and market the Company’s price leader strategy to leverage customer acquisition at new and existing Company stores. Moreover, it focuses on building momentum in the cannabis wholesale segment through product expansion and enhancing its distribution across the markets. Furthermore, the management expects that its recent introduction of oils and extract products into the company’s product offering would result in expanded revenue streams. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 0.40 as on September 15, 2021. We have considered Aytu Biopharma Inc, Cumberland Pharmaceuticals Inc, etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on September 15, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.