Return Of The Mall; Initiating At Outperformer
Our Conclusion
As of January 30, we initiate coverage on Primaris REIT with an
Outperformer rating and a $17.50 price target. The portfolio has dominant
positioning in strong secondary markets with low competition, and is in the
advanced stages of stabilization. We consider the impact of the pandemic as
largely transient and expect the underlying steady growth profile to become
evident once temporary headwinds fade. There is a wide opportunity set of
acquisitions, and intensification potential offers value-creation avenues. We
particularly like the conservative financial profile and cash flow retention, with
leverage metrics that are superior to peers by a wide margin.
Key Points
Not All Malls Are Equal: Primaris’ properties are often the only mall in town,
and we estimate the REIT has at least a 20% share (up to 60%) of all retail
space in its largest secondary markets. We view these malls as more
resilient due to structural demand from local shoppers, lower capital intensity
(vs. urban, super-regional malls), and a greater focus on tenant affordability.
The portfolio is close to stabilization following anchor departures, and
in-place occupancy has more upside (high-80s to low-90s). We believe
Primaris can deliver stabilized organic growth in the low single digits.
Conservative Financial Profile: D/GBV of 29%, and ~5.3x D/EBITDA, is a
stand-out in the sector as the average peer D/GBV is ~44% and only a
handful of REITs are at or below 30%. The long-term targets are 25%-35%
D/GBV and D/EBITDA of 4x-6x (vs. sector at ~9x). A target FFO payout ratio
of 45%-50% and retention of ~$60MM+ in annual free cash flow facilitate the
internal funding of growth initiatives.
Large Discount, Low Expectations:We believe a discount relative to
larger, major market, essentials-focused retail REITs is reasonable.
However, at ~29% below NAV (or 37% below IFRS NAV and vs. Canadian
peers at ~8% below), units are excessively discounted and imply ~25% lower
NOI than pre-pandemic levels. While the pandemic had temporary and
permanent impacts on rent, we believe a majority of the affected NOI can
recover. We see valuation improving on demonstration of a growth track
record, NCIB activity, and an improvement in overall sentiment towards retail.
Attractive Valuation: Primaris is trading at 9.9x 2022E FFO and a ~29%
discount to our $19.50 NAV estimate, at a 6.5% cap rate. Our price target of
$17.50 is at a discount to NAV and reflects some of the uncertainty
associated with the discretionary retail footprint, smaller scale, and yet-to-beestablished track record, offset by a superior balance sheet. Our price target
implies a total return of ~32%.