Analyst update RBC Dominion Securities analyst Pammi Bir thinks Primaris Real Estate Investment Trust (PMZ.UN-T) is “punching above its weight class” and warns investors “do not let its small cap size catch you off-guard.”
“PMZ ticks a lot of our preferred boxes,” he said. “The combination of its unique strategic positioning in retail, superior growth profile, below-average leverage, and discounted valuation should appeal to a broad investor base.”
In a research report released Monday, Mr. Bir initiated coverage of the Toronto-based enclosed shopping centre-focused REIT with an “outperform” recommendation, touting its unique strategy “with levers to drive multiple up.”
“PMZ is the only Canadian REIT strategically focused on consolidating mall ownership in Canada,” he said. “As large institutional owners rebalance their portfolios toward other property types, PMZ is a natural buyer with limited competition. Specifically, PMZ is targeting more than $1-billion of acquisitions over the next three years and is already a third of the way there. As its size, diversification, and asset quality improve, we see levers to support multiple expansion.”
The analyst sees Primaris’ growth ranking above its peers, saying it is “doing it our preferred way with among sector’s best balance sheets.”
“Our 5-per-cent 2024-26 estimated FFOPU CAGR [funds from operations per unit compound annual growth rate] exceeds its retail peers (2 per cent) and the sector (4 per cent), while our 7-per-cent 1YR FWD NAVPU [one-year forward net asset value per unit] growth is slightly ahead of its retail comps (6 per cent),” he said. “Our growth is mainly organic driven, with 3-4-per-cent annual same-property NOI from recovering occupancy, decent renewal spreads, & conversion of pandemic era leases to traditional structures. PMZ’s low payout ratio also sets it up for above peer average distribution growth. Unit repurchases could also yield upside to our calls.
“PMZ’s acute focus on maintaining low leverage provides stronger relative insulation from earnings and NAV erosion risks amid potentially rising rates. Note, our 6 times 2024 estimated debt/EBITDA is well below its retail peers (8 times) and the sector (9 times). Its low leverage and payout ratio create financial flexibility to continue repurchasing units, pay down debt, fund acquisitions, and/or raise distributions. As well, debt maturities are largely addressed through 2026.”
In justifying his bullish stance, Mr. Bir also reassured investors “the mall is not dead: indeed, fundamentals are alive.”
“After a rough period in 2015-2020 (department store failures, e-commerce headwinds, COVID), tenant demand is recovering well at better quality centres, particularly with muted new supply. While an easing economy and drop-off in immigration tailwinds could create some downside risks, tenants are still catching up with the significant population driven demand growth of recent years,” he said.
Seeing Primaris’ discounted valuation presenting “an attractive entry,” the analyst set a target of $19 per unit. The average target on the Street is $18.11, according to LSEG data.
“PMZ is trading at 23 per cent below our $21 NAVPU (9.3-per-cent implied cap rate, 14 times 2025 estimated AFFO), well below its CDN retail peers (10-per-cent NAV discount) and U.S. comps (4-per-cent NAV premium),” he said. “Our $19 PT is based on an 18-per-cent discount to our $22.50 1YR FWD NAVPU. We believe our target valuation is supported by PMZ’s above average earnings and NAV growth profile, below average leverage, improvements in portfolio quality, and further anticipated strong execution.”