TD report on Earnings Event
Q4/17 results, conference call highlights, and forecast update.
Impact: SLIGHTLY NEGATIVE
Conference Call Highlights. Management highlighted that much of Cominar's
strategy (Cominar 2.0) will be re-evaluated with the new board in the coming
weeks and, as such, Cominar did not want to commit to certain targets/goals
including the 2018 disposition program (previously expected to be $1.0-1.5
billion), debt levels, and the NCIB. Cominar also stated that it intends to wind
down its relationship with Group Dallaire Construction over the next 12 months.
Management is guiding towards 1-2% SPNOI growth for 2018, driven by office
and industrial portfolios.
Distribution Cut. The REIT lowered its annual distribution by 37% to $0.72,
from $1.14, effective this month. This represents the second distribution cut since
August 2017, when the REIT cut from $1.47 to $1.14. While this announcement
came as a surprise to us and the street, we believe in the long-term this will benefit
Cominar as it should provide additional flexibility to execute on its new strategy.
NCIB. Since December 19, Cominar has repurchased 3.4 million units (Q4:
730,900 units) at an average price of $14.50 for a total cost of $49.9 million.
Forecast. We have lowered our 2018/19 AFFO/unit estimates by ~4% (Exhibit
7). We now expect a 1.5% AFFO decline in 2018 and 5.2% growth in 2019. Our
NAV declined 2% to $16.00 from $16.30.
TD Investment Conclusion
We believe the actions being implemented by management and the Board
(distribution cut, internalization of construction management) will benefit unitholders
over the long-term. We look forward to management's update with regards to
further asset dispositions, the NCIB, asset repositioning plans and target leverage
metrics. Given the uncertainty on the aforementioned, we believe there is near-term
forecasting risk, particularly around the amount of potential dispositions. In our view,
Cominar is now a "Show Me" story. On a valuation basis, the REIT is trading
at an 18% discount to our revised $16.00 NAV estimate, slightly below the 14%
discount for its diversified peers. We are maintaining our HOLD recommendation,
but lowering our target price to $14.00 from $15.00.