First Capital REITs

First Capital Realty Inc. (TSX: FCR.UN) is engaged in the business of acquiring, developing, redeveloping, owning and managing mixed-use urban real estate.

Key Highlights 

• Improving portfolio occupancy rate: The company witnessed a slight improvement in its portfolio occupancy rate, which increased 0.2% from 96.0% at September 30, 2020, to 96.2% at December 31, 2020, due to new tenant possessions exceeding closures. The same property portfolio occupancy has also shown a marginal improvement of 0.1% compared to September 30, 2020.

• Rising lease renewal rate: In Q4 2020, the company completed 704,000 square feet of lease renewals across the portfolio. It achieved a 5.5% increase in lease renewal rate, comparing the per square foot net rental rate in the last year of the expiring term to the per square foot net rental rate in the first year of the renewal term. Approximately 43% or 306,000 of the lease renewal activity in the quarter represented fixed-rate renewals.

• Property Dispositions:Recently, the company completed the disposing process and gathered CAD 117 million in Q4 2020. It disposed 50% non-managing interest in a portfolio of six properties located in Gatineau, Burlington, Edmonton and Calgary, and two land parcels located in the Greater Montreal Area. 

• Maintaining a strong balance sheet and liquidity position: The company hold CAD 923 million of cash and undrawn credit facilities along Unencumbered properties with an IFRS value of CAD 7.0 billion. On top of all, less than 6% of the total debt would be maturing in 2021. Furthermore, the company has reduced its distribution to unitholders, through which it would retain approximately CAD 95 million per annum.

Source: Company

Financial overview for FY2020

Source: Company

• In FY 2020, the company reported its NOI at CAD 399million, against CAD 460.4 million in the previous corresponding period. The decline in NOI was primarily due to lower property rental revenue. 
• EBIT declined drastically at CAD 31.4 million in the reported period, against CAD 332.1 million in pcp. This massive fall in EBIT was primarily due to a decrease in value of the investment properties by CAD 185.7 million, lower interest and other income, coupled with losses from joint ventures worth CAD 7.8 million.
• Net income stood at CAD 7.5 million, against CAD 414.3 million in the previous corresponding period. The reasons discussed above were behind the lower net income. 

Risks associated with investment

The company’s business prospects might get hindered by lower occupancy levels due to continuation of restriction by the state and provincial Governments.

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company’s urban portfolio is focused on everyday essentials and continues to attract strong tenant demand. In 2020, it completed approximately 2.8 million square feet of leasing activity across the portfolio. In Q4 2020, the company witnessed a slight improvement in its portfolio occupancy rate, which increased by 0.2% from 96.0%. Furthermore, the company is continuously focusing on maintaining a strong balance sheet and optimizing its liquidity position. Recently it gathered CAD 117 million through the disposing process. Based on the rationales discussed above and valuation, we recommend a “Buy” rating at the closing price of CAD 16.65 on March 10, 2021. We have considered CBRE Group Inc, Crombie Real Estate Investment Trust, Choice Properties Real Estate Investment Trust, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 10, 2021). Source: Refinitiv (Thomson Reuters)

Cominar Real Estate Investment Trust

Cominar Real Estate Investment Trust (TSX: CUF.UN) is a Canadian REIT involved in the ownership and management of properties throughout the Canadian provinces. Cominar's real estate portfolio comprises a mix of office, retail, and industrial and mixed-use properties.

Key highlights 

• An Income Play: The group continues with a track record of dividend payment. Recently, the company announced a monthly dividend of CAD 0.03 per unit payable on March 15, 2021, with a record date of February 26, 2021. At the last closing price, the stock was offering a dividend yield of 3.8%, which translates into an essential factor for regular income-seeking investors with a long-term horizon.

• Consistent rent collection: Despite the headwind of COVID-19, the REIT’s consolidated rent collection for Q4 2020 stood at 95.8%, while for the full year, it registered a mark of 97.2%. On a sequential basis, the company consistently kept this ratio above 95%, which is admirable.

Source: Company

• Healthy liquidity: As on December 31, 2020, the company’s available liquidity of CAD 339.4 million consisted of CAD 325.8 million of unsecured credit facility and CAD 13.6 million of cash and cash equivalents. The liquidity provides the flexibility to the company to carry its operations flawlessly. 

Financial overview

Source: Company

• In FY 2020, the Company reported total rental revenue of CAD 661.3 million, compared to CAD 704 million in the previous corresponding period. The revenues were affected by lower revenues from percentage leases and by decreases in temporary rentals and parking revenues.
• Net operating income stood at CAD 327.1 million compared to CAD 358.3 million in FY 2019; the fall in net operating income was primarily due to lower revenues and marginally higher operating cost.
• The Company posted net loss of CAD 329.3 million, compared to net profit of CAD 462.4 million. The decline from profit to loss was primarily due change in fair value of investment properties worth CAD 469.8 million. Adjusted net income for FY 2020 was of CAD 181.6 million compared to CAD 202.3 million for last year.

Risks associated with investment

The revenue and operating results depend significantly on the occupancy levels and rent collection; hence, the group is subject to general business risks. These risks include government regulation and oversight changes, consumer preferences changes, fluctuations in occupancy levels and business volumes, competition from other players, and general economic conditions.

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

Despite the challenges brought by the pandemic on the real estate industry, the company's operating and financial results demonstrated the resilience of its portfolio in these exceptional circumstances, driven by the strong performance from industrial and office segments, which enjoyed the same property NOI growth during 2020 of 3.3% and 4.6%, respectively. Rent collection improved to 95.8% for the quarter and totalled 97.2% for 2020 and recorded a growth of 7.4% on the average net rent of renewed leases for the year. Further, the current liquidity position of CAD 339.4 million provides them with healthy financial flexibility. We expect an improvement in the rent collection and a decline in operating cost, further supporting its overall performance and free cash flows. Therefore, based on the above rationale and valuation, we recommend "Buy" rating at the closing price of CAD 9.52 on March 10, 2021. We have considered InterRent Real Estate Investment Trust, SmartCentres Real Estate Investment Trust, Killam Apartment REIT, etc. as the peer group for comparison.

1-Year Price Chart (as on March 10, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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