CIBC commentPLAZA RETAIL REIT
Conservative Strategy Working Out Our Conclusion Plaza’s growth driver (i.e., value-add developments) remains intact and the REIT has a robust pipeline underpinned by grocery and other essential needs-based open-air centres. Encouragingly, retailer demand for new stores is strong, fueling the REIT’s development pipeline. We also view Plaza as relatively sheltered from potential cap rate expansion, as the REIT has typically had a conservative IFRS valuation (~7% cap rate vs. peers in the range of 5.25%-6%). Further, the REIT’s long-standing strategy of locking in long-term debt is expected to soften any refinancing impact from higher rates, as new financing rates are similar to or below Plaza’s expiring debt.
Our estimates are unchanged, and we lower our price target to $4.75 after applying a slight discount to our $5.00 NAV, similar to peers.
Key Points Results: PLZ reported Q2/22 FFO per unit of $0.10, in line with our estimate and consensus. SPNOI improved 2.4% on leasing up, rent escalations and lower bad debt expenses. Growth of 5% in Ontario and 9% in Newfoundland and Labrador was offset partly by a decline in Quebec.
Leasing: The REIT renewed ~192k sq. ft. in Q2, and the YTD rent spread is 2.9% over prior in-place rents. Plaza also completed ~113k sq. ft. of new leasing. For the rest of 2022, the REIT has ~139k sq. ft. of lease maturities or ~2% of the total portfolio. Management noted they have successfully been able to capture inflation through higher rents.
Value-add Pipeline: Plaza’s development pipeline stood at ~1.2MM sq. ft. and the REIT expects to spend ~$13MM to $14MM on its remaining projects in construction, to be largely funded with existing development facilities or construction loans. The total cost for developments and redevelopments is estimated to total between $120MM and $130MM. The pipeline for new developments is driven by grocery and other essential needs retailers, and management noted healthy demand from new store openings.
Debt Strategy: Plaza has ~$17MM of mortgages due in the remainder of this year and ~$29MM coming due in 2023, at rates in the range of 4.6% to 4.75%. Plaza has historically relied on fixed-rate mortgage financing for long terms. As a result, upcoming maturities are at interest rates that are close to current financing rates. Year-to-date, Plaza obtained long-term financing of $18.5MM for an average 9.2-year term at a rate of 4.05%, and renewed $23.1MM of mortgages for a 3.7-year term at a rate of 4.83%.
Cap Rate Tracking: Weighted average IFRS cap rate was 6.77% (vs. our 7%) estimate, unchanged from last quarter, and down from 6.90% at Q4/21.
Company Profile Plaza Retail REIT has ownership interests in retail properties (predominately open-air centres) totaling ~8.8MM sq. ft. The REIT is controlled by co-founders, Trustee Earl Brewer and President and CEO Michael Zakuta (~20% equity interest).
Investment Thesis
Plaza enjoys a strong position in Atlantic Canada where management has a long operating track record and local market knowledge. Growth strategy involves acquiring opportunistic assets and generating returns through redevelopments, and a ~1.1MM sq. ft. development pipeline that adds to NOI growth. We like Plaza's approach to value creation, and view valuation as fair vs. peers.
Price Target
(Base Case): C$4.75 Our 12- to 18-month price target is $4.75, which is slightly below our NAV estimate, and equates to 11.6x 2022E FFO.
Upside Scenario: C$6.00 In our upside scenario, we increase our NOI assumption by 2.5%, reduce our cap rate by 25 bps and apply a 5% premium to NAV.
Downside Scenario: C$3.00 In our downside scenario, we decrease our NOI assumption by 2.5%, increase our cap rate by 25 bps and apply a 30% discount to NAV.
Balance Sheet: The REIT continued to repurchase units under its NCIB for a total of ~5,100 units YTD and 1.15MM total units purchased since the commencement of the NCIB in 2018 (average price of $4.02/unit). Plaza recorded a modest ~$6.4MM fair value decrease in Q2, reflecting cap rate expansion.
Stress Test:
Given the current economic environment, we analyzed PLZ’s possible downside in both a recessionary and stagflationary scenario. PLZ’s downside in our recession and stagflation scenario implies an impact to FFO/unit of ~2% and ~5%, respectively. Additionally, we applied a corresponding 1x and 2x P/FFO multiple compression in a recession and stagflation scenario, respectively.
Relative Valuation: Units are down ~13% YTD vs. the broader XRE index down ~15% YTD, and in line with large-cap retail peers. The REIT currently trades at 9.7x 2023 P/FFO, compared to a 2019 average of 12.9x. Over this same time period, consensus FFO is projected to increase by ~9.1% (or ~27% excluding non-recurring revenue in 2019), suggesting that the market may have overreacted in the sell-off of the space (PLZ has historically traded at a ~12.5x P/FFO). We view Plaza as offering more defensive, resilient characteristics than the market is implying.