Whiterock REIT reported Q1/10 diluted FFO/unit of
.40 vs.
.47 in Q1/09, which is
below our
.43 estimate but above consensus at
.38. The sequential improvement from
.37 in Q4/09 reflects the accretive impact of recent acquisitions. We are not surprised
with the wide variance between our estimate, consensus and the actual reported results
owing to the high volume of transactional activity (deleveraging and acquisitions) during
Q1/10.
Portfolio stats were soft in Q1, but should improve through the year. Same-store cash NOI
declined by 1% in Q1/10 over Q1/09, mainly attributable to lower occupancy during the
quarter. Q1/10 occupancy came in at 95.3%, sequentially down 90 bps from Q4/09, and
down 180 bps from Q1/09. The sequential drop in occupancy is mainly a result of
vacancies in Moncton, NB, and Nisku, AB. The Nisku vacancies have been fully re-leased
subsequent to Q1/10 and will begin contributing to NOI in 2H/10 (along with the re-leasing
at 655 Bay St and 193 Malpeque).
Risk profile continues to diminish as deleveraging is now visible and FFO/unit growth is on
the upswing. Deleveraging drove D/GBV to 64% in Q1/10 from ~73% for most of 2009.
Although leverage is still higher than peers’, it approaches 61% if we treat the in-themoney
converts as equity (series F is being converted into units at a rapid pace). Over time
we’d like to see total leverage in the high 50s, which doesn’t seem as far off as it did for
most of Whiterock’s public history. At quarter-end liquidity was strong at $50 million,
leaving room for additional investments.
Maintaining BUY and C$16.50 target. We continue to like the steps the REIT has been
taking with respect to the following factors: (i) deleveraging; (ii) high-quality acquisitions;
(iii) a near-sustainable AFFO payout ratio. We believe management will be successful in
growing the company into a high-quality mid-cap REIT in the foreseeable future. Our
C$16.50 target price is based on a modest premium to our $15.25 pre-tax NAV estimate
using a 7.50% portfolio cap rate.