CIBC commentsSMARTCENTRES REAL ESTATE INVESTMENT TRUST
The Jewel In The Crown
Our Conclusion SRU has increased its ownership stake in SmartVMC materially.
Our key takeaways include: 1) the acquisition is in line with management’s stated strategy of focusing on developments as a key pillar of long-term NAV growth; 2) SRU now has full control over its flagship development, which, all things equal, is a net positive; and 3) while the transaction is marginally dilutive to FFO in the near term, the REIT has effectively bolstered its longerterm growth profile.
We’ve updated our estimates to reflect the increased leverage and equity issuance, as well as the incremental NOI related to the acquired lands. Our NAV remains unchanged (equity issued in line with our estimate of NAV), and we continue to set our price target in line with NAV parity (which also remains unchanged at $34).
Our Outperformer rating is rooted in the REITs valuation optionality; units currently trade at a 12% discount to NAV – we believe that this discount should narrow over time (in acknowledgement of the strong recovery observed across retailers this year, alongside the REIT’s substantial development potential).
Key Points Transactions Details: SRU has agreed to acquire a two-thirds interest in 53 acres in SmartVMC (the 105-acre master-planned City Centre in the Vaughan Metropolitan Centre), for $513MM. The transaction size is significant, as it more than doubles SRU’s interest in SmartVMC. Of note is that the entire development is now wholly owned through the SmartCentres/Penguin partnership; Penguin, which is owned by Mr. Goldhar, owns the remaining 33.33% of the acquired lands
Impact To FFO: Of the 53 acres acquired, approximately 11 acres are currently occupied by various retailers, including a 146,000 sq. ft. Lowe’s store and several QSRs. While these in-place tenants provide modest holding income, it should be noted that the majority of the acquired real estate is slated for longer-term development, and as such is non-income producing at this time. Accordingly, the transaction is modestly dilutive to our near-term FFO estimates. To be clear, we believe that SRU’s development expertise is best-in-class, and the FFO contribution of future developments on the acquired lands (as they are transferred to IPP) are therefore likely to accrue to a more compelling cash flow profile than might otherwise be achievable through the acquisition of only income producing properties.
Impact To NAV: The acquisition will be funded through the issuance of ~$200MM in subsidiary SmartCentres REIT LP units, to be issued at $34.50/unit (which will be exchangeable into SRU units), as well as $313MM from debt facilities and cash on hand. Given that the issuance price is roughly in line with our curr