CIBC comments on resultsPRIMARIS REAL ESTATE INVESTMENT TRUST
Right Place, Right Time
Our Conclusion
Having gone through some testing times, enclosed malls are on the path to recovery and to a more resilient future. In this environment, Primaris is well positioned to capture near-term recovery from the pandemic, and in the medium term, restore the portfolio to the mid-90% committed occupancy level observed prior to department store failures.
This bodes well for organic growth and presents upside to our forecast. Expanding disclosures, establishing a quarterly growth track record and increasing investor awareness have the potential to narrow the NAV discount in the near term.
We increase our NAV to $21.00/unit, keeping the 6.5% cap rate, as we include the intensification value for Dufferin Grove. Accordingly, we increase our price target from $17.50 to $18.50.
Key Points
An Improving Outlook: Primaris has done significant heavy lifting on its malls and intentionally added several large-format tenants to its roster while reducing exposure to small fashion tenants and the like, resulting in a more resilient tenant mix. Leasing interest is solid and management noted that Q4/21 saw the highest number of deals since Q4/16. Further, Q4 tenant sales were 90% to 110% of pre-pandemic levels, with the lagging malls mostly in Ontario. Productivity of these malls is expected to rebound to be in line with other regions on full reopening.
Pandemic Update: For 2021, the REIT had ~$7.8MM in allowance for expected credit losses (for the Primaris properties), down from ~$12.9MM the prior year. All of the REIT’s malls are presently open, with some under occupancy limits. The REIT collected 96.5% of contractual rents in January 2022 for the Primaris assets.\
Operations: Overall in-place occupancy was 86.0%, with 87.5% in the Primaris assets and 83.2% in the HOOPP properties. Excluding Northland Village, which is slated for redevelopment, in-place occupancy was 87.6%.
Balance Sheet: Debt to total assets was 28.4%, and in management’s target range of 25% to 35%. Including the HOOPP properties, the REIT has ~$1.9B of unencumbered assets. Post quarter, the REIT arranged a $700MM unsecured syndicated revolver, maturing on January 4, 2025. On March 7, the REIT announced its inaugural issuer rating of BBB with a stable trend by DBRS Morningstar. The REIT’s pro forma EBITDA coverage ratio was 5.5x, and in management’s target range of 4.0x to 6.0x. The REIT has also received approval for an NCIB to repurchase up to ~7.5MM units commencing on March 9, 2022, and the units are currently trading at a steep discount to IFRS NAV of $22.07 (6.52% IFRS cap rate).
Leasing: The REIT is targeting 94% to 96% in committed occupancy over the next several years vs. 89.1% at Q4/21. In 2022, the REIT has ~1.0MM sq. ft. of lease maturities, or ~1.8% of total GLA. These maturities have an average in-place net rent per sq. ft. of ~$23.00, compared to ~$23.50 for the overall portfolio at Q4/21. E-Commerce Integration: Following the initial rollout of the REIT’s e-commerce mall marketplace Primarch, in partnership with Dropit during November 2021 at five properties, PMZ is projecting to expand by three properties per quarter. The REIT is targeting for every Primaris location to be on the platform by the end of Q2/23. The REIT has 27 brands under contract in the platform and has an additional 10 brands in advanced negotiations to join. Strong sales under the platform could provide upside to our estimates as the REIT receives a percentage of marketplace sales.
Development Pipeline: The REIT received conditional approval from the City of Toronto to develop four acres of the total 21 acres at Dufferin Mall to encompass 1,200 residential units and ~120k sq. ft. of commercial space. The REIT recorded a fair value gain of ~$239MM on its investment properties, largely driven by the recognition of land value at Dufferin Mall from conditional approvals. At Northland Village in Calgary, the REIT is planning to convert the enclosed shopping centre into an open-air centre. Additionally, ~2 acres at the property were severed and sold to a residential developer for ~$5.8MM in January 2022. Feasibility studies are also underway at seven other assets to explore alternate uses such as self-storage facilities and hotels. PMZ spent ~$25MM on redevelopment projects in 2021 and expects to spend a comparable amount in 2022.
Distribution Payout: PMZ pays an annualized distribution of $0.80 per unit, which represents a ~66% 2022 AFFO payout ratio, and compares to the average payout of ~74% for Canadian retail REITs.
ESG: The REIT achieved its target for a 5% reduction in energy usage across its assets, and has achieved close to 100% construction waste diversion. PMZ has installed electric vehicle charging stations at ~41% of Primaris assets vs. the prior target of ~75% by the end of 2022. PMZ has included waste sorting stations in all food court renovations over the past five years.
Historical Valuation: PMZ is currently trading at a ~23% discount to consensus NAV estimate vs. Canadian retail REIT peers at a ~9% discount to NAV and the overall Canadian real estate universe at a ~12% discount to NAV. Our FFO estimates imply annual growth of ~2% from 2022E to 2023E, reflecting an improving operating environment and the relaxation of pandemic restrictions for indoor shopping centres.