RioCan Real Estate Investment

Riocan Real Estate Investment (TSX: REI.UN) Trust is a Canadian real estate investment trust, which owns, develops, and operates a portfolio of retail-focused, increasingly mixed-use properties. 

Key Updates:

• Ample Liquidity and Strong Balance-sheet: The group reported optimum liquidity of CAD 1.6 billion, which seems to be sufficient to meet the working capital needs and capital expenditures. In Q4FY20, the group issued CAD 500 million of senior unsecured debentures, with a coupon rate of 1.974% per annum. Moreover, debt to total assets stands at ~45%, and the company is targeting to reduce it to 38% to 42%, which would further enhance the company’s financial flexibility.

Source: Company Reports

• An Income Play: Over the years, the company has distributed a consistent dividend to its shareholders, backed by impressive cash flow from operations, which is a key positive. Moreover, the stock of REI.UN carries an annualized dividend yield of ~5.18%, which is lucrative amid low interest rate environment.

Ten Years Dividend payout (Source: Refinitiv, Thomson Reuters)

• Stable Rent Collection: Despite the second wave of COVID 19 pandemic, the company reported a stable rent collection of 94.2% in Q4FY20 and 91.7% in January 2021. The result seems impressive amidst the closure of 23% of the Trust's tenants on account of more extensive and restrictive closures mandated in certain provinces across Canada. Notably, the company holds ~CAD 28.6 million of security deposits and ~CAD 4.6 million of letters of credit from several tenants, which would likely to support the company’s operations in case of unresolved tenant defaults. 

FY20 Financial Highlights:

• UN announced its full-year result, wherein the company posted revenue of CAD 1,143.663 million, as compared to CAD 1,326.325 million in the previous year. The decline was primarily attributable to a significantly lower residential inventory sale (CAD 36.347 million versus CAD 208.965 million in FY19) coupled with a lower income from the property management and other service fees (CAD 16.584 million versus CAD 23.633 million in FY19).
• Operating income stood at CAD 680.283 million, lower than CAD 748.612 million a year ago. The decline was primarily attributable to a lower income, partially offset by lower operating costs (CAD 463.380 million versus CAD 577.713 million in FY19).
• The company reported lower interest costs (CAD 180.811 million versus CAD 182.780 million in FY19) and a decline in general and administrative expense (CAD 40.524 million versus CAD 46.814 million in FY19), coupled with a significantly lower transaction and other costs (CAD 2.934 million versus CAD 12.833 million in pcp).
• The company reported a net loss of CAD 64.780 million, as compared to an income of CAD 775.834 million in FY19.
• Cash and cash equivalents were recorded at CAD 238.456 million, while total assets were recorded at CAD 15,267.708 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: A rise in the vacancy rate would result in the lower rent collection and would hinder the company’s overall operations.

Valuation Methodology (Illustrative): EV to EBITDA based valuation.

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

Stock Recommendation:

Due to the ongoing restriction, the retail segment witnessed a lower traction in the recent past, and the group derived only 0.9% of its total revenue from the retail segment. Moreover, within the residential segment, the company reported a stable rent collection of ~98% during Q4FY20, which is a key positive. Moreover, the group is a friend of income investors and offering a lucrative yield amid a low interest rate environment. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Apartment Properties Real Estate Investment Trust, Dream Office Real Estate Investment Trust etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.55 on February 23, 2021.

REI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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

• Rental Rate Growth Continues:In Q4 2020, same property rental rates increased to 3.4% against 2.4% in Q3 2020. Despite the current economic environment, demand remains strong for turnover units with trust achieving 5.7% rental rate growth on the regular unit turns during Q4-2020.

Source: Company

• Steady rent collection: Despite a slowdown in the overall economy, the trust posted an impressive rent collection rate of 99.7% in FY 2020. Historically, the company had less than 0.3% of revenue uncollected, and currently the management does not expect a material increase in rental defaults in 2021, which is noteworthy.

Source: Company

• Healthy Financial metrics: The trust generated strong financial growth in the recent past, where it reported a 17.4% CAGR during FY16 to FY20 in its total assets, while the net operating income grew at a CAGR of 11.8% during the same time frame. Debts, in term of assets, reduced to 44.6% in FY20, from 53.5% in FY16. We believe the momentum to continue in the foreseeable future, as the company had CAD 1 billion of development pipeline to support future growth.

Source: Company

• 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 March 15, 2021, with a record date of February 26, 2021. Moreover, at the last traded price, the stock offered a healthy dividend yield of 3.87%, which looks decent considering the current macro environment.

Source: Refinitiv (Thomson Reuters)

Financial Overview of Q4 2020 (In thousands of CAD)

Source: Company

• In Q4 2020, the Company posted a slight growth in its property revenue to CAD 66.8 million, compared to CAD 62.7 million in the previous corresponding period.
• NOI stood at CAD 41.7 million in Q4 2020, compared to CAD 39.9 million in Q4 2019.
• The Company's net income fell to CAD 48.5 million in the reported quarter, compared to 126.8 million in Q4 2019. The prime reason behind the fall in net income was higher fair value gains on investment properties recognized in Q4 2019.
• Despite the impacts of COVID-19, the company achieved a 2.2% increase in same property revenue and a 0.9% increase in same property net operating income ("NOI") over Q4 2019. 

Risks associated with investment

The Company's revenue and operating results depend significantly on the occupancy levels and rent collection; hence, any fluctuation in these would affect the overall performance. 

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

FY2020 came with many unforeseen challenges for the Company, but still, they witnessed healthy operating and financial performance. The Company posted an impressive rent collection rate of 99.7% in FY 2020. Furthermore, they generated the same property NOI growth of 2.3% versus 2019 and Achieved a 2.0% increase in the same property revenue, including 2.4% from the apartment portfolio, which looks attractive. We expect an improvement in the rent collection and a decline in provisions in the coming time, further supporting the Company's overall performance. Therefore, based on the above rationale and valuation, we recommend a "BUY" rating at the closing price of CAD 17.58 on February 23, 2021. We have considered InterRent REIT, Canadian Apartment Properties REIT, Allied Properties REIT, etc., as a peer group for the comparison.

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.