TSX:SRU.UN - Post by User
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incomedreamer11on May 16, 2024 10:40am
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Post# 36043342
Scotia comments after conference
Scotia comments after conference
We're Still on the Sidelines; Dispositions Would Improve Sentiment, In Our View
OUR TAKE: Neutral. We maintain our SP rating, with our key estimates down 1%-2% (Exhibits1-2) following a solid Q1 print, fairly consistent with peer revisions (Exhibit 3). There’s minimal change to our Neutral thesis, with relatively high financial leverage (Exhibit 4) and rising debt refinancing costs (Exhibit 5) limiting recurring AFFOPU growth (Exhibit 6), which was part of our REI downgrade rationale yesterday, and despite SRU firing on most cylinders operationally (high occupancy and improving lease spreads; Exhibits 11 and 12). That said, we think SRU has lagged YTD (-6% vs. -2% peer avg.) partly because of limited expected low-cap rate asset dispositions (a la FCR). Combined with its higher floating rate debt (~19% of total debt vs. sub-10% sector avg.; a good portion of which we think is capitalized though) and general market aversion to debt, we think “FFOPU-accretive” sales is perhaps a more meaningful catalyst than maintaining sector-high occupancy/growing lease spreads. SRU hinted it is willing and able (to sell density) once the land prices recover (no timing provided; we have no dispos in our forecast). Until then, we still believe the ~8% distribution yield will comprise a majority of the near-term return.
KEY POINTS
What’s changed? Not much as shown in Exhibit 2. We reflect a recovery of the 80bp q/q fall in occupancy (in-place) by Q3/24, with Q4/24E of 98.2% surpassing Q4/23A by 10bp. Our 2024E SSNOI of 2.8% slightly trails the Q1/24A of 3%, while we boosted our 2024E and 2025E blended lease spread to 5% (from 4%; includes anchors). Our NAVPU estimates fall $0.50 on carrying forward the ~$1M Q1/24A NOI variance (Exhibit 13), although we find fairly wide q/q variances in CAM costs can impact our NOI more than one would expect.
Call Highlights. Most of the call focused on SRU’s ability and desire to sell residential density, in our view. We felt SRU was more direct in affirming both (than in the past), but timing remains questionable as the referenced catalyst = land value recoveries (recovery not quantified), while a potential range of dispositions (in $s) was also omitted. Strong retail demand (i.e., SRU leased ~82% of total 2024 maturities in Q1; a record) is opening up “accretive” retail developments (SRU added 0.2Msf) which are a combo of earnouts and 100% SRU projects, with SRU open to building retail on residential density for the right tenant (and price).