First Capital REIT

First Capital REIT (TSX: FCR.UN) is a leading owner, operator and developer of mixed-use real estate located in Canada's most densely populated cities. First Capital's focus is on creating thriving urban neighborhoods to generate value for businesses, residents, communities and our investors.

Key highlights 

• Increase in adjusted cash flow from operations: In Q1 2021, the company’s reported “ACFO” totaled CAD 42.6 million compared to CAD 38.9 million in the previous corresponding period. An increase of CAD 3.7 million in ACFO was primarily due to lower capital expenditures and higher interest expense savings. 

• Healthy portfolio occupancy rate:The company witnessed a slight deterioration in its portfolio occupancy rate, which decreased 0.4% to 95.8% from 96.2% in Q1 2021, due to tenant closures (97,000 sf) exceeding new tenant possessions (44,000 sf) and the final transfer of certain development properties to the operating portfolio. Although, the company witnessed marginal decrease in its occupancy rate, but it maintained the healthy level of above 95% despite the unfavorable time.

• Rising lease renewal rate:In Q1 2021, the company completed 450,000 square feet of lease renewals across the portfolio. It has achieved 10.4% increase in lease renewal rate (comparing the rental rate in the last year of the expiring term versus the average rental rate over the renewal term). It also witnessed an increase in the average rental rate per occupied square foot for the total portfolio by 0.5% from CAD 21.89 as of December 31, 2020 to CAD 21.99 on March 31, 2021 primarily due to rent escalations and renewal lifts.

• Maintaining a strong balance sheet and liquidity position: As of May 4, 2021, the trust holds approximately CAD 745 million of cash and undrawn credit facilities along with unencumbered properties with an IFRS value of CAD 6,874 million. 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. 

Financial overview

Source: Company 

• In Q1 2021, the company reported its NOI at CAD 100.9 million against CAD 103.1 million in the previous corresponding period. The decline in NOI was primarily due to lower property rental revenue, which stood at CAD 171.9 million V/s CAD 176.1 million. 
• Income before taxes increased drastically to CAD 38.5 million in the reported period, against a negative EBIT of CAD 52.3 million in pcp. This massive rise was primarily due to a lower decrease in value of investment properties.
• Net income stood at CAD 37.6 million, against a loss of CAD 50.8 million in the previous corresponding period. The reasons discussed above were behind the rise in net income. 

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection. Hence, fluctuations in occupancy levels and delay in rent collection would affect the group’s financial performance. 

Valuation Methodology (Illustrative): Price to Earnings 

Stock recommendation

Despite the ongoing challenges, the trust’s urban portfolio remained robust, as shown by strong leasing activity, increases in the average net rental rate, and consistent cash collections. The REIT also reported a CAD 42.6 million rise in adjusted cash from operations in Q1 2021. Furthermore, the company is continuously focusing on maintaining a strong balance sheet and optimizing its liquidity position. They also made a temporary reduction of its monthly distribution. The reduction would provide an additional retained cash flow of approximately CAD95 million. Based on the rationales discussed above and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 17.51 on May 25, 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 May 25, 2021). Analysis by Kalkine Group

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

Killam Apartment Real Estate Investment Trust

Killam Apartment Real Estate Investment Trust (TSX: KMP.UN) is a Canada based “REIT”, which specializes in the acquisition, management and development of multi-residential apartment buildings, manufactured home communities (MHCs) and commercial properties.

Key highlights

• Rise in fund from operations: In the first quarter of 2021, the firm generated CAD 25.1 million in funds from operations, up from CAD 23.0 million in the previous quarter. The rise in “FFO” of 9.1% was principally due to contributions from acquisitions and finished developments, same-property NOI growth, and lower interest expenditures. These were slightly offset by a 5.2% rise in the weighted average number of units outstanding.

• Registering sequential growth on same property NOI: During Q1 2021, the company had a 3.1% increase in same-property NOI and a 60-basis point increase in operating margin. Rental rate increased and low operational expenditure growth drove the improvement. Operating costs rose by only 0.5%. During the first quarter, the REIT's same-property apartment NOI climbed by 3.1%, with New Brunswick and Charlottetown leading the way (7.1% and 4.7%). Despite the depressed environment, the REIT is showing significant sequential growth.

Data Source: Company

• Substantial Development Activity: The company continues to progress its development pipeline, with five active ventures comprising 497 units and a total investment of CAD 236.0 million projected in Q1-2021. Killam invested CAD 18.0 million on its active development projects in Q1-2021 and finished the 10 Harley development a 38-unit building in Charlottetown, PE. This project was substantially completed in March 2021, and it presently has a 63% occupancy rate. 55% of the company’s development pipeline is located outside Atlantic Canada, and the business aims to attain a NOI of 36% by 2025.

• Consistent dividend distribution: The group continues with a track record of dividend distribution and recently declared a monthly distribution of CAD 0.05667 per unit to be paid on June 15, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of ~3.6%, which looks decent considering the current macros and low interest rates.

Dividend History, Analysis by Kalkine Group

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company

• In Q1 2021, the Company posted a slight growth in its property revenue to CAD 67.3 million, compared to CAD 63.2 million in the previous corresponding period.
• NOI stood at CAD 40.2 million in Q1 2021, compared to CAD 38.0 million in Q1 2020.
• The Company's net income fell to CAD 27.4 million in the reported quarter, compared to 38.5 million in pcp. The prime reason behind the fall in net income was higher fair value gains on investment properties in the prior period. 

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection. Hence, fluctuations in occupancy levels and delay in rent collection would affect the group’s performance. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

As the company continues to execute its long-term plan, it achieved strong operating and financial achievements for the first quarter of 2021. Strong rental demand in the maritime provinces and Ontario, produced positive same property net operating income growth for the 28th consecutive quarter. Moreover, it reported a 3.3% increase in same property rents and realized a 60-basis points expansion in its same property operating margin. In addition, the company's development program is on track, with five projects now in the works and NOI projections of 36% by 2025 from its development pipeline outside of Atlantic Canada is notable. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 19.02 on May 25, 2021. We have considered InterRent REIT, Canadian Apartment Properties REIT, Allied Properties REIT, etc., as a peer group for the comparison.

1-Year Price Chart (as on May 25, 2021), Analysis by Kalkine

*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.