A recent Investor’s Digest of Canada survey of 51 income trusts covered by leading analysts across Canada featured three REITs to buy.
Artis REIT: Waiting for the big reveal
CIBC World Markets analyst Dean Wilkinson awaits more definitive progress on the significant components of Artis REIT’s (TSX—AX.UN) transformation plan. On top of its transformation plan, the company includes dispositions and increased unit buybacks, which is in keeping with its well-defined strategic initiatives, Mr. Wilkinson adds.
While Artis’ units are trading 20 per cent below its net asset value (NAV) of $14.50 per share, its peers are trading 10 per cent below. The analyst expects uncertainty around execution of the bigger transformation plan may continue to weigh on valuation in the interim. He maintains the relative valuation gap (at least for the short term). Though near-term earnings fade in relevance given the pending transformation, he estimates a NAV increase on unit buybacks.
Mr. Wilkinson maintains his “neutral” recommendation and $12 target unit price, at a roughly 17 per cent discount to his revised $14.50 per share NAV.
The company continues to progress on its three development projects in process, and completed the conversion of its Dunwin Drive property into commercial condos along with roughly $13.9 million of condo sales. During the quarter, the REIT acquired an interest in a land parcel in the Greater Phoenix region, in addition to the remaining five per cent in an industrial property in the Greater Houston area. Artis also sold an industrial property in Greater Denver for about US$53.2 million. Post first quarter, the company sold four retail properties in Fort McMurray and Regina for $57.2 million, along with an office property in Calgary for $4.8 million.
The REIT had liquidity of about $423 million in the first quarter, in addition to roughly $1.9 billion of unencumbered assets. The REIT completed the redemption of its roughly $250 million Series C senior unsecured debentures upon maturity and could look to capitalize on interest rates with project-level or asset-level financing. The REIT has also been active on unit buybacks (common and preferred) having spent over $24 million during the quarter.
First-quarter 2021 funds from operations was $0.35, ahead of Mr. Wilkinson’s estimate of $0.32 and consensus of $0.33.The REIT has collected 98.6 per cent of first-quarter 2021 contractual rents.
Plaza Retail REIT: Brighter future awaits
Following the activity hiatus brought on by COVID, Plaza Retail REIT (TSX—PLZ.UN) is poised to seize value-add development opportunities, both pre-existing and new ones emerging post-pandemic. CIBC World Markets analysts Sumayya Syed and Scott Fromson say Plaza could also benefit from enclosed mall retailers seeking open-air space, especially in Atlantic Canada.
The analysts also say: “As larger peers advance their mixed-use development pipelines, Plaza has not wavered from its tried-and-tested strategy of focusing on unenclosed retail redevelopments and developments. However, similar to peers, we expect units could continue to trade at a wide discount to net asset value (NAV), reflecting cautious expectations around a recovery in retail. Following an in-line quarter, we maintain our ‘neutral’ rating, and increase our price target to $4.25 per unit, from $4, slightly narrowing the NAV discount (calculated at $4.50 per share).”
Ultimately, the analysts note, “Plaza enjoys a strong position in Atlantic Canada where management has a long operating track record and local market knowledge. Growth strategy involves acquiring opportunistic assets and generating returns through redevelopments, and an approximately one million square foot development pipeline that adds to net operating income growth. We like Plaza’s approach to value creation, and view valuation as fair versus their peers.”
Funds from operation (FFO) per unit were $0.09, in line with analyst estimates and consensus. Compared with last year, FFO per unit would have been up by six per cent excluding the impact of lease buyouts, insurance proceeds, and bad debt expenses.
The REIT collected 98.6 per cent of gross rents, compared with 99.2 per cent last quarter and granted abatements totalling 0.1 per cent and deferrals totalling 0.7 per cent. Currently, approximately 93 per cent of the REIT’s portfolio is open for business, compared with approximately 96 per cent last quarter.
The REIT maintained modest buyback activity and has taken advantage of declining interest rates with refinancings, as the interest rate on fixed rate mortgages improved approximately 30 basis points to 3.92 per cent at the first quarter.
Dream Office REIT: Return to the office is very possible
Dream Office REIT (TSX—D.UN) revealed its first-quarter 2021 figures, which were by no means stellar but highlighted the ongoing divergence between renewal dynamics and new leasing activity. On the positive front, the REIT has been able to maintain fairly standard retention levels at rental rates similar to those seen pre-pandemic, without a significant increase in incentive offerings or leasing costs.
National Bank Financial analysts Matt Kornack and Hussam Maqbool give the REIT an “outperform” rating and up their target price by a loonie, to $23 a unit.
They go on to say: “New leasing has been materially impacted by ongoing lockdowns and health measures with limited take-up of space being handed back on tenant turnover (there isn’t clear signaling that this turnover is pandemic or work from home related). The result has been an ongoing occupancy grind, which is more pronounced in the Toronto portfolio, given historical stability in the market and higher in-place and potential rents.
“Management isn’t inclined, at this point, to compete on rate given the desire to improve the offering and the long-term implications of doing so on property values. As Canada’s vaccination rollout has accelerated and case counts in Toronto have stabilized, we expect investor sentiment to support trading prices and Dream is relatively inexpensive on a per square foot basis and implied cap rate basis.
“First-quarter 2021 funds from operation per unit was $0.38 versus $0.39 in the first quarter of 2020, largely in line with us and consensus at $0.39. Net operating income came in 6.9 per cent below us (in large part due to declining occupancy in the Toronto portfolio) partially offset by lower general and administrative costs.
“Some of the recent occupancy decline was also due to the REIT’s Bay Street assets where the REIT sees a medium-term repositioning opportunity. While results in its Toronto portfolio did show signs of weakness, there were also some notable positives.
“Mainly, average rents increased by 1.5 per cent in the same-property portfolio and in-place rents remain 20 per cent below market. On the latter, it was encouraging to see leasing spreads in the first quarter of 20.8 per cent on market rate renewals.”
This is an edited version of an article that was originally published for subscribers in the June 4, 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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