A recent Investor’s Digest of Canada survey of widely covered income trusts featured three real estate investment trusts favoured by analysts.
According to analyst Yashwant Sankpal of Laurentian Bank Securities, Boardwalk REIT’s (TSX—BEI.UN) Alberta concentration (two-thirds of their suites are in Alberta) has been the main cause of concern for investors.
Despite the steady improvement in Alberta real estate rental fundamentals over the last year, BEI’s stock has gone sideways and trades at one of the highest discounts to net asset value (NAV) in the Canadian Apartment sector.
The analyst goes on to note: “The oil price supply shock experienced mid-Sept should accelerate the recovery in rental fundamentals further. We believe Boardwalk should now be on the radars of investors for the following reasons. Improvement in rental fundamentals should accelerate.
Alberta real estate market strengthening
“Despite the lukewarm oil environment over the last one year, strong inbound-migration and deteriorating housing affordability have caused rental fundamentals to improve in Alberta.
“According to Mainstreet Equity Corp., a close competitor of BEI, its Alberta portfolio is expected to see 300-400 basis points occupancy gains in the third quarter leasing season. With BEI’s Alberta occupancy already above the key level of 95 per cent, the resultant margin expansion should start driving its cash flow growth. BEI’s current net operating income is 20 per cent below the stabilized level as margin expansion hasn’t taken a hold yet. Supply shocks like the current one are likely to accelerate this recovery further.”
Boardwalk has produced one of the highest funds from operations (FFO) growth rates per-unit in the Canadian REIT sector since its inception. It was a darling of Canadian REIT investors until 2014-15, before the oil market crash. BEI’s FFO has now turned the corner after the dip subsequent to the oil price crash. However, valuation has not come back yet.
“BEI has a fully internal operating platform and an aligned management team. CEO, Sam Kolias owns a 13 per cent interest, and his family owns an additional 13 per cent interest. We are maintaining our ‘buy’ rating and $56 price target.”
Summit generates significant realized gain
Summit Industrial Income REIT (TSX—SMU.UN) announced that the REIT monetized its data centre (DC) investments in DC1 and DC2 in the Greater Toronto Area (GTA), and in the 544 Rue de l’Inspecteur development project in downtown Montreal, for approximately $178 million in gross proceeds. The sale of Summit’s interests in two DC development projects in the GTA and Montreal, included the repayment of outstanding mezzanine and working capital loans totalling about $62 million.
According to Toronto-based IA Securities analyst Brad Sturges: “The disposition is estimated to generate a realized gain of about $42 million (or $0.35 per unit), while the implied exit cap rate for DC1 in Richmond Hill, Ont. is estimated to be around six per cent, well below our applied 6.7 per cent cap rate to determine Summit’s estimated net asset value.
“As a result of the completed transaction, we are increasing Summit’s NAV estimate to $11 per unit, up from $10.75 per unit previously. Reflecting Summit’s policy of declaring a special distribution of up to 20 per cent of any realized gain achieved from completed property sale(s), Summit has announced a special distribution of $0.07 per unit paid on Oct. 2 to unit holders of record.
Summit to focus on industrial properties
“While the REIT is largely monetizing its DC investments to focus on its core Canadian industrial property growth activities, Summit intends to maintain a more modest investment in the development of DC2 in Richmond Hill and the Montreal DC development project through new joint ventures (JVs) with Urbacon Ltd. and with a major Canadian institutional investor.
“Participation by Summit may provide the potential to generate outsized development returns upon completion and stabilization of the two ongoing DC development projects. Bottom line: Summit successfully realized a very healthy return on its investments by acting as a capital provider for the DC development JV with Urbacon.
“Going forward, Summit intends to redeploy proceeds from the disposition into its core Canadian industrial facility acquisition and development activities.
“Notably, the REIT suggests that it is currently reviewing an active acquisition pipeline in its targeted Canadian industrial real estate markets of the GTA, Montreal and Calgary.
“Summit’s units are trading at 21.7 times fiscal 2019 funds from operation, 11 per cent above our estimated NAV of $11. Our 12-month price target of $14 remains unchanged as does our ‘buy’ rating.”
Raymond James adjusting BSR estimates
BSR REIT (TSX—HOM.UN) recently announced the closing of a US$40 million bought deal and $15 million Private Placement, with proceeds used to acquire (in part) two apartment blocks in Austin, Texas.
In addition to the bought deal offering, BSR REIT also closed on the private placement of approximately 1.4 million units to Vision Capital Corp., for gross proceeds of US$15 million.
Toronto-based Raymond James analysts Johann Rodrigues and Joanna Chmiel say, “BSR won’t grow like the Ontario apartment REITs but it also still trades at a hefty (-11 per cent) net asset value (NAV) discount. We maintain our ‘outperform’ rating and our lowered $11.50 target price is based on units trading at 16 times our revised 2020 AFFO estimate, modestly above its current multiple.”
Austin deal is a departure from BSR norm
Taking a closer look at the acquisition, the analysts highlight: “BSR acquired two apartment communities in Austin for $104 million. Gross proceeds from the financing were used to fund the acquisition of two Class A garden style apartment communities, Cielo and Madrone. Cielo consists of 326 units, sits on 38-acres in Hill Country while Madrone, a 228 unit complex, sits on 41-acres adjacent to Cielo.
“The $104 million acquisition therefore increases BSR’s portfolio to 10,268 units and its Austin (a city with strong population and job growth prospects through to 2022) exposure to 840 units.
“We are lowering our estimates following both the equity raise and completed acquisitions, driven largely by the equity raise which was issued at a 13 per cent discount to our NAV at the time of the raise.
“While the internal rate of return on this deal should be accretive over the longer-term, issuing at a 6.5 per cent implied cap rate to buy at a going-in five per cent is immediately dilutive (about two per cent) to both FFO and NAV.
“Although this acquisition does mark the stark step away from the REIT’s historical strategy of buying Class B assets in the markets they’ve spent their lives investing in. Austin is one of the strongest multi-family markets in the country, which adds significant quality to a legacy portfolio that’s already been culled of its bottom 10 per cent.”
This is an edited version of an article that was originally published for subscribers in the November 1, 2019, 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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