‘Income Trust Insider’, a regular feature of Investor’s Digest of Canada, monitors the 47 most widely-covered business, resource, utility and real estate investment trusts across Canada. This month the editors featured three of the REITs recommended as ‘buys’ in recent brokerage reports.
H&R REIT (TSX—HR.UN) recently announced its sale of a 50 per cent non-managing stake in its TransCanada Tower for $257.4 million to HOOPP Realty.
Pursuant to the terms of the deal for the Calgary skyscraper, the implied rate works out to 5.15 per cent on in-place income, which exceeds what National Bank Financial had projected, analysts Matt Kornack, Dawoon Chung and Ammar Shah say in a research note.
They add that the cap rate shows that the asset value nearly doubled since the construction of the TransCanada Tower by the real estate investment trust back in 2001.
“H&R’s sale of a 50 per cent non-managing interest in its TransCanada Tower points to continued active asset management and capital recycling at the REIT,” say the analysts.
“The cap rate came in better than what we were expecting after the prospects of a sale were raised on H&R’s second-quarter conference call.” Messrs. Kornack, Chung and Shah say that H&R will use the asset sale proceeds to pay back the $82.1 million existing mortgage, which had a lofty in-place interest rate. Whatever is left of the proceeds will then go towards reducing other debt obligations.
Due to the divestiture and the deleveraging, H&R’s unencumbered holdings will climb to $2.6 billion, up from $2.1 billion as of the second quarter of this year. Meanwhile, the REIT’s overall debt as a percentage of total holdings slides to 44.2 per cent compared to 45.8 per cent previously. The analysts say that the reduced leverage gives H&R more financial flexibility to pursue possible acquisitions.
“Pro forma leverage levels are attractive and provide ample liquidity for expansion of the REIT’s U.S. multifamily platform, which has garnered more attention of late from an asset allocation standpoint given the higher organic growth prospects in this segment,” add Messrs. Kornack, Chung and Shah.
The analysts keep their ‘outperform’ recommendation, a ‘below-average’ risk rating, and their $25.75-per-unit target price for H&R.
Cominar REIT raises $200 million in gross proceeds via units offering
Separately, the three National Bank Financial analysts also commented on recent activity at Cominar REIT (TSX—CUF.UN) which closed its 12.8 million trust units offering on Sept. 23. The offering, priced at $15.65 per unit, brought in gross proceeds of $200 million.
According to the analysts, net proceeds, after factoring into the equation commissions and expenses, worked out to $191.7 million.
Messrs. Kornack, Chung and Shah say that the REIT will use the offering net proceeds to pay back amounts outstanding on its unsecured revolving credit facility. They add that Cominar, as of the second quarter of this year, had drawn $246.5 million out of $700 million available on its unsecured revolving credit facility.
“While the timing and pricing of the REIT’s equity offering was far from ideal. Cominar still has many levers to pull in terms of realizing value in its current portfolio,” say the analysts.
“This, combined with its discount relative to peers, justifies our ‘outperform’ rating. It is worth noting that general market pressures have been impacting all REITs as the segmented occupancy figures illustrate.
“The onus remains on management to execute on their business plan, while proactively managing the REIT’s capital structure and operating performance. Absent a near-term turnaround in underlying fundamentals moving forward, maintaining current distribution levels is likely going to require strategic decisions on capital recycling and investment prioritization without losing sight on value-enhancing property management and leasing.”
The analysts keep their ‘outperform’ recommendation, but they reduce their 12-month price target to $17.50 per unit from $18.75 a unit.
Seasoned management makes junior real estate trust a buy
In a Sept. 8 research note, Haywood Securities analysts James Reid and Aazan Habib initiated coverage of PRO REIT (TSXV—PRV.UN).
The analysts, who assigned a recommendation of ‘buy’ and a 12-month target price of $2.50 per unit in their inaugural report on PRO, classify the REIT as a high-yield opportunity that offers a substantial and manageable payout ratio. They add, moreover, that investors will benefit from “healthy” dividends and possible multiple expansions as the REIT grows.
According to Messrs. Reid and Habib, PRO possesses around 1.7 million square feet of gross leaseable area.
Of that amount, government and national tenants account for 83.5 per cent of the base rent. They add that investment-grade tenants make up 52.4 per cent.
“Its weighted average occupancy rate is 95 per cent,” say the analysts, “with an average remaining lease term of 6.3 years—second highest in its peer group in this regard.”
Additionally, its lease maturity profile is staggered such that no more than 13 per cent of its base rent matures in any given year until 2021, the analysts note. The largest concentration of base rent is nine per cent while all other tenants are below eight per cent, thus reducing reliance of any one tenant.
“We believe that PRO’s portfolio construction should profile stability to cash flows going forward,” say Messrs. Reid and Habib.
The REIT has quite a bit of experience in its management ranks, say the analysts, who note that members of its management team and its board of directors have experience purchasing and managing real estate holdings worth a combined $4.2 billion. Messrs. Reid and Habib add that members of the management team have previously built up and sold off a REIT, which, the analysts say, lessens execution risk at PRO.
The analysts note that one of the things that sets PRO apart from other REITs is its strategic development pact with Lotus Pacific Investments and Crux Capital. The pact will enable it to grow its geographic footprint and also provide it with a pipeline for acquisitions going forward, they argue.
The analysts, who say that PRO has thus far done a good job of buying properties and integrating them into its portfolio, add that they expect to see the company continue its acquisition strategy.
Such a strategy could grow funds from operations (FFO) by 25.4 per cent this year and by 31.1 per cent next year.
Investor’s Digest of Canada, MPL Communications Inc.
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