3 commercial REITs to buy

Here are three real estate investment trusts to buy—a renewable power producer, a leading retail REIT and an urban commercial property developer.

Perfectly positioned but priced high

Raymond James Financial analyst Frederic Bastien still calls Brookfield Renewable Partners LP (TSX—BEP.UN; NYSE—BEP) a world-class renewable energy powerhouse and is confident it will play a critical role in helping economies meet their ambitious de-carbonization ESG (environmental social governance) goals.

The company generated US$0.31 per share for fourth-quarter 2020, versus both Mr. Bastien’s forecast and the consensus of US$0.32. Generation was below the long-term average across the hydroelectric and wind portfolio, but a successful revenue claim dating back to 2015 in Brazil and capital recycling gains in solar and wind helped make up the shortfall. The analyst says he never put much weight on Mother Nature’s vagaries on a quarter-to-quarter basis, as they tend to even out over the long run. For proof, consider that Brookfield’s hydro reservoirs are at healthy levels, positioning the business for a solid first-quarter 2021.

Although early into 2021, the company has given Mr. Bastien good reasons to push his forecasts higher, he says. Firstly, the global independent power producer agreed to acquire Exelon Corp.’s US distributed generation platform, which comprises 360 megawatts of operating capacity across nearly 600 sites and another 700 megawatts under development. The US$300-million investment furthers Brookfield’s ambitions to offer both corporations and institutions a ‘one-stop’ solution for energy generation, storage and procurement.

Secondly, Brookfield will buy the 845-megawatt capacity Shepherds Flat wind farm in Oregon, one of the largest such projects in the US. Importantly, the company will have the opportunity to overhaul the fleet with bigger and better turbines and boost total generation to the tune of 25 per cent by 2022. Lastly, Brookfield added ready-to-build development assets to its Brazilian portfolio at premium returns.

Mr. Bastien maintains his “market perform” recommendation and increases his target unit price as he says it would be ill-advised to go against a stock that finds itself at the nexus of powerful ESG trends and positive market sentiment, though its risk-to-reward is balanced.

A durable business for a tough time

As has been the case through 2020, for CT REIT (TSX—CRT.UN) according to National Bank Financial analysts Tal Woolley and Eric Kim, they expect that CRT will lead the retail REIT universe in adjusted funds from operations (AFFO) growth per unit, among other metrics, in the fourth quarter of 2020 (as it did in the second and third quarter as well).

CRT suffers minimal exposure to hard-hit retail categories during the pandemic (e.g. apparel, entertainment), and derives 92 per cent of its base rent from Canadian Tire, one of Canada’s strongest retailers. This translated into bad debts minimally affecting 2020 fourth-quarter results.

The analysts maintain their “outperform” rating for the REIT.

They go on to say: “We continue to like CRT’s simple business model and strong ties to one of Canada’s leading, investment-grade retailers, that drives resilient, growing cash flows, and translates into growing FFO per unit and distributions for unit holders.

“CRT’s balance sheet provides flexibility to grow CRT announced new investments totalling $65 million, on which CRT expects to earn a 6.41 per cent yield. CRT was able to maintain its investment program in 2020, deploying $209 million in capital while also increasing its distribution to over two per cent. CRT had total liquidity of approximately $300 million at year-end 2020.

“Rent collections, occupancy prove resilience of CRT Rent collections averaged over 99 per cent for the fourth quarter, with the strong performance continuing into 2021 as CRT collected 99.4 per cent of rents in January 2021. CRT also increased occupancy to 99.3 per cent (up 50 basis points quarter-over-quarter).

“Management also provided some details on the first phase of its Canada Square redevelopment, a mixed-use development project 50/50 owned by CRT and Oxford Properties. For the first phase of this large project, the redevelopment would incorporate a mixed-use residential tower above a bus depot currently operating on the site. It would also include public amenities such as new transit entrances and public green space. On the mixed-use portion, management is currently contemplating a residential rental tower built upon a retail base.

Heading back to the office in 2021

Urban commercial property developer Allied Properties REIT (TSX—AP.UN) has experienced a recovery in leasing activity since the second quarter of 2020. In 2020, Allied renewed or replaced approximately 893,000 square feet of space, achieving about a 17 per cent increase over expiring rents. Raymond James Financial analysts Brad Sturges and Joanna Chmiel give the REIT an “outperform” rating and a $48 target unit price.

Expounding further, the analysts state: “As the various COVID-19 vaccines are more broadly distributed to the Canadian public in the coming weeks and months, we believe Allied’s units offer an attractive ‘reopening trade’ opportunity as lockdown restrictions ease, and companies finalize their respective return to office plans. The large dislocation between Allied’s current unit price and the REIT’s underlying asset values tends to be a very rare occurrence for Allied, which we believe could offer investors a sizable total return opportunity if this pricing gap closes back to previous historical levels.

“For the fourth quarter of 2020, funds from operations were $0.59 per unit, up from $0.58 per unit a year ago. The REIT’s fourth quarter 2020 same-property rental income for its rental portfolio increased 2.5 per cent year-over-year.

“While Allied’s average physical occupancy rate dipped to approximately 92.1 per cent in fourth quarter 2020 mainly due to expected vacancies, and the intentional de-leasing of certain buildings related to the REIT’s repositioning initiatives, Allied suggests that its average occupancy rate perhaps could increase over the course of 2021.

“Importantly, Allied noted that the majority of its sublease space is in Toronto (approximately 56 per cent of sublease exposure), where Allied’s buildings continue to be in demand and where its in-place rents are currently well below market rates. Interestingly, Allied believes it can eventually capture the higher market rents by converting these shorter leases to new long-term agreements with these sublease tenants.

“Allied suggests there is early evidence of recovering transactional activity for downtown urban work space, notably in downtown Toronto and downtown Vancouver, following a fairly quiet period since the start of the pandemic. Allied intends to take advantage of any infill and larger Class I brick-and-beam and traditional office acquisition opportunities in its target markets of Toronto, Montreal and Vancouver in 2021.”

This is an edited version of an article that was originally published for subscribers in the March 5, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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