Slate Office REIT

Slate Office REIT (TSX: SOT.UN) is a Canada based open-ended real estate investment trust which focuses on acquiring, holding, developing, maintaining, improving, leasing, managing or otherwise dealing with office properties in Canada. The REIT's portfolio consists of approximately 34 commercial properties located in Canada.

Key highlights 

• An Income Play: The group continues with a healthy record of dividend payment. Recently, it announced a monthly dividend of CAD 0.0333 per unit, representing CAD 0.40 per unit on an annualized basis, payable on November 15, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~7.5%, which is lucrative considering the current interest rate dynamics. This would attract several investors looking for a consistent income stream.
• Occupancy growth: The occupancy of the REIT ended the second quarter at 83.6%, up 10 basis points from the first quarter of 2021. As the fundamentals of office real estate in the REIT's markets continue to improve, management expects additional occupancy improvements, which would be an advantage.

• Stable income: Despite the challenging environment, the REIT is collecting a rent at steady pace in cash each month. These substantial cash rent collections are a function of the portfolio’s resilient tenancies, comprised of 60% government or credit-rated tenants. The portfolio's strong credit tenancies have a weighted average remaining lease term of 5.4 years.

• Disposing office property in Toronto: Recently, the REIT announced that it has entered into an agreement to sell an office property at 1 Eva Road in Toronto, Ontario for a sale price of CAD 34.0 million. The sale price is significantly higher than both the REIT’s original purchase price of the asset.
• Event update: The company would release its Q3 2021 financial results on November 4, 2021.

Financial overview of FY2020 (In thousands of CAD)

Source: Company

• In Q2 2021, the company posted its rental revenue at CAD 41.5 million, reflecting a decline of 7% on y-o-y basis. The decline was primarily due to a significantly lower Gross leasable area along slight lower occupancy.
• Net operating income stood at CAD 22.3 million, lower than CAD 23.4 million in Q2 2020. The decline was primarily due to lower revenue, partially offset by lower property operating expenses (CAD 18.8 million versus CAD 20.3 million in pcp).
• The company reported a net income of CAD 5.6 million, parallel to the net income in Q2 2020.
  

Risks associated with investment

The Company's revenue and Operating results depend significantly on the occupancy levels and rent collection. Hence, the Company is subject to general business risks. These risks include government regulation and oversight changes, consumer preferences, fluctuations in occupancy levels and business volumes. 

Valuation Methodology (Illustrative): EV to EBITDA 

Stock recommendation

REIT's strong second quarter results demonstrate the continued strengthening of the real estate market and the demand for office space, moreover it witnessed strong leasing activity at an overall rental rate spread of 16.9%. Continued progress on vaccines will support further increases in touring activity, office utilization rates and real estate fundamentals, which is a key positive for the REIT. Moreover, the stock is offering a lucrative dividend yield amid a low-interest rate environment. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 5.32 as on October 20, 2021. We have considered True North Commercial REIT, Artis REIT as the peer group for the comparison.

1-Year Price Chart (as of October 20, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Spark Power Group Inc

Spark Power Group Inc (TSX: SPG) is independent provider of end-to-end electrical contracting, operations and maintenance services, and energy sustainability solutions to the industrial, commercial, utility, and renewable asset markets across North America. 

Key highlights

• Awarded three new solar projects: The company recently teamed up with GP JOULE, a worldwide renewable energy company, to build three new solar power projects in Western Canada with a combined capacity of 70 MW. For the substation connectivity parts of each project, Spark power will offer complete engineering, procurement, and construction assistance, as well as electrical house supply and commissioning scope. We believe this is a great opportunity for Spark Power to expand its solar power services in Alberta.
• Robust growth in revenue: In Q2 2021, the company earned CAD 65.4 million in sales, up from CAD 46.3 million in the corresponding period, indicating a 41.1% gain. The major reason for the shift was organic growth of 44.1% in the renewables business area, as well as a 40.1% rise in Technical Services revenue. Furthermore, the company's green division provides services to fast-growing industries such as Battery Energy Storage Systems (BESS) and Electric Vehicles (EVs). In the coming days, we expect the aforementioned trend to continue, bolstering the company's cash flows.
• Experiencing positive signs of revival: The company received compensation in the form of subsidies from both the Canadian and US governments, allowing it to stay afloat during difficult times. In particular, the company is seeing increased new bookings in FY2021, which is being aided by better business circumstances. Revenues, new bookings, and consumer engagement are projected to remain robust in FY2021, with management anticipating higher margins owing to decreased COVID-19 protocol expenses.
• Utilizing customer database for organic growth: Recently the company announced that current and established consumers in California would be able to take advantage of solar technologies. To meet the rising demands of the solar market, the organization is focused on leveraging its local footprint and customer partnerships, as well as its technological and sustainability capabilities.

Financial overview of Q2 2021 (in thousands of Canadian dollars)

Source: Company

• In Q2 2021, the company’s revenue increased 41.1% to CAD 65.3 million, against CAD 46.3 million in the previous corresponding period. The group reported higher revenues as it witnessed healthy performance from every segment.
• Gross profit stood at CAD 15.8 million compared to CAD 15.9 million in pcp, supported by a higher income, partially offset by higher cost of sales.
• Income from operations slightly fell to CAD 2.7 million, against CAD 2.9 million in Q2 2020, primarily attributable to increase in selling, general and administrative costs at CAD 14.1 million V/s CAD 11.5 million.
• The net income in the reported period stood at CAD 0.1 million compared to CAD 1.2 million mainly due to higher taxes and transaction costs.

Risk associated with investments

The company reported a surge in its total debt due to working capital requirements, capital expenditures and debt service requirements. Continuation of the above trend would lead to higher finance costs, which would further dampen the company’s profitability. 

Stock recommendation

The company is witnessing positive signs of a steady return to pre-pandemic levels of operations and positive trends in margins in key parts of the business, as a result it clocked robust revenues under every segment, which is a key positive. Furthermore, the company's new approach of leveraging its current market footprint and customer partnerships in California is expected to help the company expand organically. On the valuation front the stock is trading at EV to sales multiple at 0.8x compared to the industry median of 1.8x. Hence, considering the above-mentioned facts, we recommend a “Hold” rating on the stock at the closing price of CAD 2.10 on October 20, 2021.

One-Year Technical Price Chart (as on October 20, 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.