CT Real Estate Investment Trust T.CRT.UN

Scotia comments

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Defence Is the Name of the Game

OUR TAKE: Neutral. CRT is one of the better performing REIT’s YTD (down 2% vs sector down 15%). In our view, CRT provides a high degree of protection in a recession-like scenario. With continued talks of economic deceleration, we think CRT will continue to outperform in the current uncertain environment. We remind that CRT has almost bond-like cash flow profile with long lease terms at pre-determined rent reset formulas. CRT has delivered consistent AFFOPU growth of +5.8% CAGR since 2014 (Exhibit 4). Recession or no recession, we place a very high likelihood of 5.4% AFFOPU CAGR in 2021A-23E. Combine this with distribution yield of 5.1% at 71% payout ratio, CRT is well-positioned to deliver low-double-digit total return (Exhibit 1 shows CRT’s meaningful price outperformance vs sector and retail peers since inception).

Our target is reduced to $18.00 (-$1.00) and largely based on our NAV. Our NAVPU is slightly reduced to $17.75 as we increased our cap rate assumption by 5bp (largely in line with expansion based on CBRE cap rate survey). IFRS terminal cap rate was increased 2bp q/q – appraisals done on 11% of portfolio in Q2 suggesting flat cap rates. Reiterate our SO rating.

KEY POINTS

Operating Metrics remains solid and consistent (no surprises). We highlighted previously that CRT has never missed Street FFOPU estimates and Q2 was no exception. For operating metrics – see Exhibits 6-7. SP NOI grew +2.8% in Q1/22 vs +2.5% in Q1/22 and +3.0% in 2021 (vs +1.6% in 2020 full year). Weighted average lease term at 8.6 years (vs 8.5 years last q), which is one of the highest in the sector (after APR). IFRS NAV was up slightly q/q – management remains cautious and watchful for potential cap rate expansion in H2/22. On the development side, CRT disclosed that 1.16M sf (vs 1.44M sf last q) of GLA is under development with total investment requirements of ~$366M (vs $380M last quarter) which equates to ~5.5% of total asset base. CRT expects to spend $150M in the next 12 months (mostly funded by internal sources of cash and undrawn credit facility).

Credit markets still not helping REITs valuation. See Exhibit 5 shows Valuation relative to parent co. unsecured debentures: CRT's current implied cap rate spread is only 82 bps over CTC 2035 debentures vs. historical average of 189 bps since 2015 (ex-COVID). The spread has narrowed a lot as Debenture yield on CTC 2035 Debentures have moved to 5.4% (vs 4% in Nov’21). So, yield in bond markets have moved up ~100bp in a span of few months. We will continue to watch the trend and implications for CRT.