First Capital Realty Inc.

First Capital REIT (TSX: FCR.UN) is a developer, owner and operator of mixed-use urban real estate in Canada's populated centres. The company's focus is on creating thriving neighbourhoods that create value for businesses, residents, communities and investors.

Key Highlights 

• Event Update: The Company will release its fourth quarter ended December 31, 2020 and fiscal year 2020, financial results on Wednesday, February 10, 2021.

• Strategic sale of properties:Recently, the company announced an agreement to sell a 50% non-managing interest across a diverse portfolio of six grocery-anchored properties, and 100% interest in a portion of the development land at Place Panama on Montreal’s south shore, for an aggregate combined sale price of approximately CAD 115 million.

• Generating Healthy Adjusted Cash Flow from Operations (ACFO):The management achieved 89% of the target to reduce 2020 operating and capital spend by CAD 75 million. As a result of this, the company generated CAD 68.1 million of ACFO, compared to CAD 60.5 million in Q3 2019. The increase in ACFO by CAD 7.6 million was primarily due to the cash inflow of the government-funded CECRA loan and lower capital expenditures. Furthermore, the company announced the temporary reduction of its monthly distribution from CAD 0.0716 per unit to CAD0.036 per unit as a strategy to strengthen its financial position. The decrease in the distribution will provide an additional retained cash flow of approximately CAD 95 million.

• Maintaining a strong balance sheet and liquidity position: The company hold CAD 835 million of cash and undrawn credit facilities along with Unencumbered properties with an IFRS value of CAD7.0 billion. On top of all, less than 6% of the total debt will be maturing in 2021, which is positive from the point of liquidity retention.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company reported NOI of CAD 101.4 million, compared to CAD 115 million in the previous corresponding period. The decline in NOI was primarily due to lower property rental revenue. 
• EBIT declined drastically at CAD 9.2 million in the reported quarter, against CAD 99.3 million in Q3 2019. This massive fall in EBIT was primarily due to a decrease in value of an investment by CAD 41 million, lower interest and other income, coupled with losses from joint ventures worth CAD 6.6 million.
• Net income stood at CAD 11 million in Q3 2020, against CAD 78.7 million in Q3 2019. 

Risks associated with investment

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

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

The company is continuously focusing on maintaining a strong balance sheet and optimizing its liquidity position. Recently, they agreed to sell a 50% non-managing interest across a diverse portfolio of six grocery-anchored properties, and 100% interest in a portion of the development land for an aggregate combined sale price of approximately CAD 115 million. They also made a temporary reduction of its monthly distribution. The reduction will provide an additional retained cash flow of approximately CAD 95 million. Presently the company holds CAD 835 million of cash and undrawn credit facilities along unencumbered properties with an IFRS value of CAD7.0 billion seems sufficient to meet the current working capital requirements. Based on the rationales discussed above and valuation, we recommend a “Buy” rating at the closing price of CAD 14.55 on February 2, 2021. We have considered SmartCentres Real Estate Investment Trust, CBRE Group Inc, Crombie Real Estate Investment Trust, etc. as the peer group for the comparison. 

Source: Refinitiv (Thomson Reuters)

Cominar Real Estate Investment Trust

Cominar REIT (TSX: CUF.UN) is a Canada-based real estate investment trust (REIT) that owns and manages properties in Quebec's province. Its segments include Office, Retail and Industrial and flex. It holds a portfolio of approximately 331 properties, composed of office, retail and industrial and flex buildings, of which 201 are located in the Montreal area, 111 in the Quebec City area and 19 in the Ottawa area. 

Key highlights

• Event Update: The company will be releasing its financial results for the fourth quarter and year ended December 31, 2020 on Wednesday, 3^rd March 2021.

• An Income Play: The group continues with a track record of dividend payment. Recently, they announced a monthly dividend of CAD 0.03 per unit payable on 15^th February 2021, with a record date of January 29, 2021. At the last closing price, the stock offers a dividend yield of 4.34%, which translates in an essential factor for regular income-seeking investors with a long-term horizon. 

• Improved rent collection: Despite the headwind, the REIT’sconsolidated rent collection for the quarter improved to 95.6% compared to 89.7% in the previous sequential quarter, which is impressive. Retail segment reflected the most significant positive change, which increased to 90.1% against 77%.

Source: Company 

• Implementing cost management to improve free cash flows: For minimizing the impact on free cash flows due to pandemic, the company is working to reduce operating expenses and capital expenditures. They took various initiatives to reduce or deferring operating expenses and capital expenditures including reduction of tenant incentives, deferral of property tax and hydro payments, temporary layoffs and reduction of operating costs, including energy and cleaning and maintenance service costs.

Financial overview of Q3 2020 (in thousands of Canadian dollars)

Source: Company 

• In Q3 2020, the Company reported total rental revenue of CAD 162.5 million, compared to CAD 171.5 million in the previous corresponding period. The decrease in rental revenue was primarily due to the fall in committed occupancy rate to 93.8% from 94.4% for the same period in 2019.
• Net operating income in Q3 2020 stood at CAD 80.9 million compared to CAD 91.44 million in Q3 2019. The fall in net operating income was primarily due to higher operating cost.
• The Company's net income in the quarter stood at CAD 44.1 million, compared to CAD 47.4 million. The decline in net income was primarily due to low committed occupancy rate, a decrease of 8.1% in same property NOI and higher Trust administrative expenses. 

Risks associated with investment

The revenue and operating results depend significantly on the occupancy levels and rent collection; hence, fluctuations in occupancy levels and rent collection would affect the group’s performance.

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock recommendation

Despite the headwind, committed occupancy rate remained stable at 93.8%. The trust recorded an 8.8% growth on the average net rent of renewed leases for the first nine months of the year, driven by the industrial and office segments. Furthermore, the current liquidity position of CAD 397 million provides them with healthy financial flexibility to navigate the unknown impact and duration of the COVID-19 pandemic. We expect an improvement in the rent collection and a decline in operating cost to further support its overall performance and free cash flows. Therefore, based on the above rationale and valuation, we recommend a "BUY" rating at the closing price of CAD 8.30 on February 2, 2021. We have considered InterRent Real Estate Investment Trust, SmartCentres Real Estate Investment Trust, Killam Apartment REIT, etc. as the peer group for comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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