Every month, Investor’s Digest surveys 48 income trusts covered by leading securities analysts. Two real estate investment trusts and an energy trust were highlights.
SmartCentres REIT (TSX—SRU.UN)
After a successful equity raise by SmartCentres REIT, Toronto-based National Bank of Canada financial analysts Tal Woolley and Eric Kim opted to bake the balance-sheet-recharging development into their projections.
The real estate investment trust recently wrapped up a $230 million equity raise, made up of 7.4 million units priced at $31.25 per unit. SRU.UN plans to use the proceeds to revitalize its credit facility, making funds available to cover development activity going forward on an as-needed basis.
“The capital raise modestly reduces SmartCentres’ leverage (now at 42 per cent debt-to-total assets versus 44 per cent previously),” say Messrs. Woolley and Kim in a Jan. 30, 2019 research note. “The raise does not materially impact our financial estimates. Pro forma our 2019 estimate for funds from operation (FFO) per unit falls by negative three per cent. We employ a modestly higher target multiple to reflect the lower leverage and our net asset value (NAV) is virtually unchanged as we roll forward our valuation horizon.”
They add that their price target of $33 per unit reflects a negative one per cent discount to National Bank of Canada’s NAV a unit, which translates to 13.3 times our 2020 estimate for price-to-adjusted FFO multiple compared to 12.5 per cent previously.
Successful offering “no small feat”
“Volatile debt and equity capital markets of late make pulling off a successful equity offering no small feat,” acknowledge the analysts. “The $31.25 offering price left something on the table for investors . . . , and shares have performed strongly since then, particularly after SmartCentres’ recent inclusion in the S&P/TSX Dividend Aristocrats Index. With capital markets still uncertain, a well-executed deal builds goodwill with both equity and debt investors (i.e., we continue to believe that unsecured investors will look favourably on these equity raises the next time SmartCentres needs to refinance).”
The analysts add that development objectives and condo sales targets remain as is. The REIT’s possible development pipeline is around $9 billion, they say.
“The company will also begin booking condo sale income in 2020 (roughly $0.24 per unit in our current forecasts, of an anticipated $0.55 per unit expected across the years 2020-to-2023 time horizon based on currently announced projects),” say the analysts, who reiterate their “sector perform” recommendation and “below-average” risk rating. “Additionally, we are also estimating another $0.04-to-$0.08 per unit in FFO annually from land sales into development joint ventures.”
CT Real Estate Investment Trust (TSX—CRT.UN)
Messrs. Woolley and Kim call CT Real Estate Investment Trust a dividend all-star with solid growth prospects.
“CRT’s conservative view on development is worth bearing in mind,” say the analysts in a Feb. 6, 2019 research note. “With the rent steps in their long-term leases, CRT should handily deliver two per cent same-property net operating income (SPNOI) growth that should drive four-to-five per cent funds from operation (FFO) per unit growth. With other further drop-downs, acquisitions and completions, FFO per unit growth of five per cent plus is possible, which puts them close to the top of the group for growth (surprising, given there are names with higher SPNOI growth, but a lot of it is funded through capital recycling, which has a financing cost drag that pulls its FFO per unit growth back closer to the mean).”
This REIT is under appreciated
The REIT, they add, has a simple business model that is not being adequately rewarded in the current market.
“CRT’s valuation has dropped to approximately 11 times 2019 price-to-FFO, which is highly attractive versus peers,” they explain. “We highlight CRT’s relatively higher FFO per unit growth (approximately four per cent) and lower leverage (46 per cent), despite its lower valuation. We also believe that the lower complexity of CRT’s business model (limited non-retail development activity, long weighted-average lease term of 10.7 years, long weighted-average term-to-maturity of 9.2 years) is under appreciated.”
The analysts reiterate their “outperform” recommendation, $14.50 target unit price and “above average” risk rating.
Crius Energy Trust (TSX—KWH.UN)
Crius Energy Trust, the Toronto-based entity that sells electricity and natural gas to residential and commercial customers, used its recent analyst day as a platform to shed light on its 2019 plans.
“We maintain our constructive view on Crius supported by what we believe will be material strides in profitability in coming months on the company’s exit from the solar business and guidance on cost improvements,” say Raymond James Financial’s Vancouver-based analysts David Quezada and Bryan Fast in a recent research note.
Discount to peer is excessive
“The company addressed several key issues and provided clarity on the 2019 outlook at its Analyst day, which we viewed positively. We continue to regard the discount to peer Just Energy as excessive, and see near-term improvements in earnings before interest, tax, depreciation and amortization, distributable cash and a reduced payout ratio to cause the differential to narrow.”
In their analysis of the company’s comments at the Analyst day, the analysts say that cost-saving endeavours are mostly complete and that the dividend payment schedule and liquidity was addressed. They add that increased profitability is projected for this year.
“With fourth-quarter 2018 results on the horizon, we expect a few remaining one-time items will hit the bottom line, but looking into 2019, we see the company returning to its core deregulated energy business,” say Messrs. Quezada and Fast. “Reflecting an increased focus on margins, we expect Crius’ customer count to decline modestly in 2019, with an expected 140,000 municipal aggregation customers scheduled to expire.
Margins trending in right direction
“However, we take comfort in that the average added margin per RCE (residential customer equivalents) continues to trend upward, while the average margin per RCE dropped continues to decline (average $66 per RCE in 2018) as negative margin municipal aggregation customers are dropped. Crius notes that embedded gross margin (estimated gross margin generated over a five-year period, undiscounted, assuming no new customers and historical attrition and renewal rates), grew by 4.5 per cent through the third quarter, despite a four per cent reduction in RCEs.
“Following the company’s announcement that they would shift to a quarterly dividend, concerns over liquidity were raised. Crius addressed these by highlighting year-end 2018 liquidity remains within historical averages.”
This is an edited version of an article that was originally published for subscribers in the March 8, 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.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846