Scotia commentsRecycling Today For A Better Tomorrow
OUR TAKE: Slight Positive.
REI highlighted the sale of 3 grocery-anchored open-air assets for $215.5M (at REI share; 1.7% of REI GAV) = a 4.1% going-in cap and $484/sf (vs. REI implied value of 5.7% and $336/sf)
Along with the Bentall GreenOak deal, REI has sold $367M at an avg. 4.11% going-in cap in 2H/21, recycling into lower debt and its attractive development pipeline, a key part of our positive thesis. Re-iterating our recently published positive thesis. REI is flat since our resumption of coverage on Oct 14th vs. -2.7% for FCR and +2.2% for CAD REITs. In a nutshell, we view REI as an attractive "Value/Recovery" play, having lost ~1.5 AFFO points during COVID vs. +3.0x for Retail peers (+2.1 for sector), despite our 2023E AFFOPU = 102% of 2019A
. Just as important, we think REI's active development pipeline (~9% of GAV, set to be completed by 2022, vs. 5.2% avg. for Retail peers; ) can create ~$1.50 of NAVPU and $0.09 of AFFOPU by 2023 (~6%), well above peers (aside from CRR; ).
We remain buyers; catalysts = Q2/21E occupancy > Q2/21A, asset sales at low cap rates, leasing at The Well, and narrowing in the 21% AFFO multiple discount to U.S. Peers ; they're up 1%-2.5% today.
KEY POINTS Focused on the balance sheet and higher return. The disclosed 2.09% disposition cap rate at Centre Carnaval LaSalle likely reflects residential intensification upside, but interestingly, the property is not in REI's Q2/21 disclosed 40.6Msf long-term development pipeline (only Impact Plaza was; ~0.8Msf). We estimate the avg. occupied net-rent/sf for the disposed commercial = ~$21.50/sf, ~7% above the Q2/21A total portfolio occupied rent of $20.05/sf (vs. 44% higher sales price on sf basis), while the avg. walk score of 81 exceeds the 64 Portfolio average. We est. the "sold occupancy of 93.5% ex. Pivot" is below the Q2/21A of 95.1% (negligible impact to reported occupancy). We understand disposition pricing was in-line with Q2/21 IFRS (i.e., in-line with the $24.78 NAVPU). We estimate the dispositions lower Q2/21 disclosed debt/GBV and debt/EBITDA by 140bp and 0.3x to 43.3% and 9.5x, respectively .