Post by
incomedreamer11 on Oct 18, 2021 11:34am
New analysis from Scotia
Investment Thesis – REI Get your Double-Double!
We are reinitiating coverage of RioCan REIT with a Sector Outperform rating (rating was placed Under Review on February 3).
Our new target price is $25.00 = an implied 17% NTM total return versus 10% for FCR and 13% sector average ; it represents the ninth-highest NTM total return forecast in our universe. Our new current and forward NAVPU estimates are $24.50 and $27.25, with our target price and current NAVPU sitting ~2% above consensus . Overall, we view RioCan as a particularly attractive recovery trade with completion of a sizeable near-term development pipeline differentiating it from “Value” peers in 2022.
REI has the 7 th highest NTM NAVPU growth forecast in our universe (10.4%) but also the 10th worst discount to current NAVPU (-9.4%), a unique “Double-Double” combination (double-digit NTM NAVPU growth; almost double-digit NAVPU discount) that we think supports outsized total returns in 2022, joining other “Value/Growth” combo favourites such as AP and BAM.
We think the key unit price catalyst is development execution, particularly at The Well (same with Allied Properties), but so is steady occupancy in 1H/21 post expiration of government support for tenants (i.e., CERS, Wage Subsidy programs) and the seasonally strong Q4 (REI management expects “historical average” tenant fallout, ). Our target multiple (16.25x) represents an above average discount to Retail peers and Sector primarily to give us a bit more margin for error (conservatism). Given REI’s improved portfolio quality over time , we believe relative target multiple (and unit price) expansion upon successful execution will potentially take the unit price and our valuation closer to our forward NAVPU over time ($27.25).
Bottom line, while the gap to FCR and arguably H&R is not material (i.e., we forecast 5%-10% relative upside versus FCR), we think REI nicely fits our broader shift toward “Value” and while perhaps it may take a couple of months (into 2022) for the next leg of unit price outperformance, we think investors are paid nicely (4.3% yield) while we wait. We don’t think the market is reflecting above-average NTM NAVPU growth. REI scores a “31” in our Fund-Quant analysis shown , below CRR (56) but ahead of FCR (25) and SRU (17). While REI scores “average” across most metrics, it ranks top quartile in NTM NAVPU growth, in part due to value creation associated with development activity
. While in aggregate, REI ranks in between second and third quartile average (42 and 30, respectively) – due to our slightly below consensus FFOPU estimates, decent 2%-2.5% SPNOI growth, and sector average AFFOPU growth – we note its trading discount to NAV is worse than third quartile average (-6%), creating an attractive risk-adjusted return opportunity in our view.