Analysts update A Securities analyst Gaurav Mathur sees Plaza Retail Real Estate Investment Trust’s (PLZ.UN-T) portfolio as “priming for gains.”
However, he warned macro headwinds are likely to slow growth in the near term, leading him to resume coverage of Fredericton-based REIT with a “hold” recommendation on Tuesday.
“Through the ensuing COVID-19 pandemic, we have read headlines about store closures and favourite neighbourhood shops shutting their doors,” said Mr. Mathur. “While things have looked bleak for a while, in our view, this hasn’t meant that retail as an asset class is dead. Based on our conversations with CRE brokers and investors, demand for high-quality retail assets – grocery-anchored centres, primary market enclosed malls, and some strip centres – has been strong. However, given the current and upcoming headwinds – future rate hikes, persistent inflation levels, labour market shortage, eroding consumer finances, constricting buyer pool, compression in development margins, etc. – we= caution investors that a further level of clarity is required when considering these assets.”
Whike he thinks Plaza has “positioned itself well in terms of a robust tenant base,” which includes essential, necessity-based services and quick service restaurants, the analyst expects a “focus on declining spending power” to affect the broader sector moving forward.
“The REIT has a robust pipeline of developments that should help counter the macro headwinds to some degree,” said Mr. Mathur. “The REIT’s operating model is to identify, develop, and redevelop outdated retail assets into modern relevant properties. In essence, the REIT looks for properties that are 60-65-per-cent occupied and can be turnaround plays. We note that strong demand from necessity-based tenants and quick-service restaurants has helped rein in vacancy rates in the REIT’s portfolio.”
“Keeping an eye on the macroeconomic picture, we expect a decline in spending power and household savings rates to offset the strong gains across the REIT’s portfolio. Based on our conversations with CRE brokers, while commodity prices have recently begun to recede, price inflation for construction materials remains a key concern, so much so that it has caused development timelines and cost considerations to be considerably overrun. We note that these concerns are not idiosyncratic to the REIT itself and are headwinds for the entire sector.”
After “strong” first-quarter results, including funds from operations per diluted unit growth of 5 per cent year-over-year, and calling its strip centre portfolio “attractive,” he set a target of $4.50 for Plaza units. The average on the Street is $5.04.
“The REIT has built a portfolio of defensive and value focused tenants which combined with the development pipeline, healthy earnings, and NAV growth, allow for its valuation to be well-supported going forward,” he concluded. “The macroeconomic conditions affect the sector as a whole and are not idiosyncratic in nature to the REIT. However, they cannot be ignored and hence on a relative risk-adjusted return basis to its peer set, we rate the units as HOLD with a $4.50 target price based on a 5-per-cent discount to our NAV estimate, that implies a 11-12 times multiple on our 2023 AFFO/unit estimate.”