RE:CIBC comments on resultsPLAZA RETAIL REIT Sticking To The Knitting
Our Conclusion As retail continues to evolve and transform, Plaza’s focus on creating value through redevelopments and developments (financed through retained cash flow, debt and non-core asset sales) has remained intact. We expect the pipeline of retailer-driven demand for space and repositioning of assets to continue to drive growth. We view Plaza’s approach to value creation favorably, though valuation is fair vs. peers, which drives our Neutral rating.
Key Points
Results: FFO per unit of $0.10 was in line with our estimate and consensus. SPNOI improved 2.7% on rent escalations and lower bad debt expenses. Excluding pandemic-related items, lease buyouts, and insurance proceeds, overall SPNOI would have increased 1% from last year. Growth of 7% in Ontario and 25% in Newfoundland and Labrador (reflecting aforementioned pandemic items) were offset by flat SPNOI in certain markets and a decline in Quebec. Rent collections are back to pre-pandemic levels and have exceeded 99% for several quarters.
Value-add Pipeline: Plaza’s development pipeline stood at ~1.1MM sq. ft. and the REIT expects to spend ~$21MM to $22MM 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 $115MM and $125MM. Upcoming completions include open-air centres in London, ON and Bedford, NS. The pipeline for new developments is driven by grocery and other essential needs retailers, and while construction costs have increased, so have rents.
Interest Rate Outlook: The REIT has not observed a significant change in transaction volumes as a result of higher rates. Plaza’s capital recycling is focused on selling on smaller assets, which are in strong demand, typically by private investors. Management continues to observe downward pressure on cap rates for assets such as free-standing pharmacies, and remains committed to sourcing land or value-add properties as opposed to finished product.
Balance Sheet: Debt to total assets was 50.4% (55.2% including converts) and down sequentially from 51.2% (56.1% including converts). At Q1, the REIT had total liquidity of ~$60.7MM comprised of cash and undrawn facilities. The REIT continued to repurchase units under its NCIB for a total of ~2,200 units in Q1 and 1.1MM total units purchased since the commencement of the NCIB in 2018 (average price of $4.02/unit). Plaza recorded a ~$12.4MM fair value gain in Q1, reflecting cap rate decreases and appraisals. IFRS cap rate declined 17bps sequentially to 6.73%.
Company Profile Plaza Retail REIT has ownership interests in retail properties (predominately open-air centres) totaling ~8.7MM 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$5.00 Our 12- to 18-month price target is $5.00, which is in line with our NAV estimate, and equates to 12.2x 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$3.50 In our downside scenario, we decrease our NOI assumption by 2.5%, increase our cap rate by 25 bps and apply a 20% discount to NAV