These three income trusts were featured in Investor’s Digest recent survey of Canada’s most widely covered income trusts.
Chartwell Retirement Residences (TSX—CSH.UN)
So far in 2021, some of the retail and diversified names are up more than 15 per cent year-to-date; however, Chartwell Retirement Residences has been largely flat year-to-date. The REIT has only shown 0.9 per cent growth in its unit price over the year.
Scotiabank analysts Himanshu Gupta and Cody Unger note they are slightly increasing their net asset value per unit (NAVPU) and are keeping their target of $13.25 unchanged. They rate the REIT a “sector perform”.
They state: “In a post-vaccine world, our NAVPU could expand to $15.10 which is based on stabilized occupancy of 90 per cent and pre-pandemic net operating income (NOI) margins—this implies 34 per cent upside to current price.
“In the US we note that some of the healthcare names with seniors housing exposure have shown recovery off the bottom (Well Health Technologies Corp. up approximately 16 per cent and Ventas Inc. up approximately 20 per cent since late Jan 2021).
“About 90 per cent of CSH’s long-term-care (LTC) residents and 59 per cent of staff in LTC homes in Ontario have received vaccinations. On the retirement-home (RH) side, 74 per cent of residents and 34 per cent of staff have received vaccinations.
“Pace of occupancy decline accelerated in 2021 with 210 basis points decline in RH occupancy 2021 year-to-date. Occupancy was impacted due to recent lockdowns and due to seasonality.
“The 2022 adjusted funds from operation (AFFO) per unit estimate is still 3.5 per cent below 2019 levels. However, AFFO payout ratio continues to be reasonable at 86 per cent in 2021 and 72 per cent in 2022. The distribution yield of 5.4 per cent looks solid in that context. We continue to see that cap rates in private markets have not changed since the pandemic.”
Alaris Equity Partners (TSX—AD.UN)
Acumen Capital is reinstating coverage on Alaris Equity Partners Income Trust and has updated estimates to account for new investments and a follow-on deal with Accscient LLC following the close of an $85-million financing.
Analyst Trevor Reynolds maintains a “buy” recommendation and increases his target share price to $21 from $19.
Alaris issued 5.3 million common units, including an over-allotment of 600,000 common shares at $16 per unit. Proceeds from the financing went toward a US$66-million investment in a new partner, Brown & Settle LLC (B&S), while two additional deals have since closed including a new investment in 3E LLC for US$30 million and a US$8 million follow-on in Accscient.
A utility service provider, 3E installs, inspects, maintains and replaces infrastructure primarily for natural gas utilities. Alaris’ investment in 3E includes US$22.5 million in preferred equity which is expected to generate annual distributions of US$3.15 million, which is equivalent to a pre-tax yield of 14 per cent in the first full year.
In addition, Alaris contributed US$7.5 million in an escrow account, which will be released as 3E meets certain hurdles within a 24-month period. If the hurdles are met in part, or in full, Alaris will release the funds in exchange for additional preferred units, which would generate up to an additional US$1.05 million annualized distribution.
The company also invested in B&S, a full-service site development contractor specializing in large-parcel site development projects which includes excavation, clearing, rock blasting, concrete, paving and utility installation. The US$66 million investment in B&S consists of US$53.7 million subordinated debt and preferred equity, and a US$12.3 million minority common equity ownership position, which is expected to generate a distribution equivalent to a roughly 14 per cent pre-tax yield.
Alaris also announced a follow-on investment of US$8 million into Accscient for additional preferred units adding annualized distributions of US$1.14 million. With the follow-on and two new investments Alaris has deployed $180 million in 2021, and $350 million over the trailing 12 months. With the deployments Alaris’ credit facility has been increased to $400 million from $330 million. Following the credit facility increase, Alaris has roughly $80 million liquidity.
Richards Packaging Income Fund (TSX—RPI.UN)
Richards Packaging Income Fund reported fourth-quarter 2020 results that were well ahead of Acumen Capital analyst Jim Byrne’s estimates, mainly due to strong organic growth, and the contribution from the recently acquired Clarion Medical Technologies.
Clarion’s revenue contribution was a substantial $22 million in the quarter, well ahead of the analyst’s estimate of $14 million. Total revenue for the quarter was $124.7 million, trumping Mr. Byrne’s estimate of $107.3 million and last year’s level of $79.5 million. The approximately 57 per cent increase in revenue year-over-year was driven by approximately 25 per cent organic growth, primarily due to continued strong demand for cosmetics and healthcare packaging. Roughly four per cent of the growth was due to the weaker Canadian dollar.
Adjusted EBITDA of $26 million also beat his estimate of $17.9 million and 2019 levels of $11.2 million. Gross profit and EBITDA margins continue to run well ahead of historical levels in part due to the pandemic demand.
Mr. Byrne comments, “We currently anticipate that 2021 will show a slight decline in organic growth given the elevated levels of growth in 2020 but still believe Richards is very well positioned given their health care focus and opportunity for more acquisitions.
“The year of 2020 was a record year for the company in every category and while 2021 should see a return to earth from the meteoric rates of growth, RPI has improved their business with Clarion and should deliver higher margins and better growth beyond 2021. RPI ended the fourth quarter with approximately $7.7 million in cash and approximately $23.6 million in debt. The company has a term loan of $35 million (maturing 2024) and an available credit facility of $65 million for future acquisitions. The company’s payout ratio (for dividends) is now approximately 23 per cent (of free cash flow per share) as it continues to generate significant free cash.
“We assume no future acquisitions in our estimates, but we believe management remains very active in its pursuit of potential targets. Our first-quarter 2021 estimates anticipate a decline from the previous year’s levels, and we expect revenue will build into the back half of this year,” says Mr. Byrne.
“RPI is unique among its packaging peers given its healthcare and cosmetics focus. The Clarion deal further differentiates RPI from its peer group, and we believe it will augment its organic growth and margin expansion in the future.” The analyst gives RPI a “buy” recommendation and a target unit price of $86.
This is an edited version of an article that was originally published for subscribers in the April 2, 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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