Post by
incomedreamer11 on Dec 06, 2021 9:19am
CIBC comments
PRO REIT
A Differentiated Proposition: Initiate At Outperformer
Our Conclusion As of December 2, we initiate coverage of PRO REIT with an Outperformer rating and a $7.50 price target. We believe PRO REIT has attractive growth potential, as the secondary market focus allows for large spreads between acquisition cap rates and the cost of financing.
As a mid-cap REIT, the relatively smaller size and large acquisition spreads position PRO REIT well for above-average per unit growth. With further expansion of the industrial footprint, we believe valuation can improve as exposure to office and retail declines, and the REIT assumes a pure-play profile. At a ~16% discount to NAV and an above-average ~7.1% yield, we regard valuation as attractive.
Key Points Diversified But Differentiated: With over 60% of rent from the industrial segment, PRV offers among the highest exposure to this sought-after asset class amongst diversified peers, and no exposure to potentially challenging asset classes (enclosed malls or large offices). We see the NOI stream as relatively more resilient, and capex requirements are significantly lower vs. peers. We are forecasting organic growth in the low-single-digit range. Apart from occasional capital recycling, there are no plans to completely exit retail and office as those assets continue to perform well. However, we believe units could trade in line with, or slightly above, NAV with continued growth in the industrial footprint.
Growth Formula That Works: PRV’s strategy differs from industrial pure-plays as the focus is entirely on secondary markets with a large Atlantic Canada footprint, where cap rates can be up to ~200 bps above major markets. Acquisition cap rates in target markets average ~6% and represent a large spread over PRV’s ~3.5% average interest rate, fueling accretive growth. Rent growth is not at the double-digit levels seen in major markets, but at a ~16% NAV discount vs. ~9% premium for industrial REITs, PRV offers exposure to solid industrial fundamentals at a more attractive valuation.
NAV Has Upside Potential: Our 6.25% blended cap rate reflects 7.0% for office, 6.7% for retail and 6.0% for industrial. Our industrial cap rate is ~10 bps below the IFRS cap rate and 115-225 bps above the industrial pure-play REITs. Geographic differences explain the spread to industrial REITs given their major market focus, but industrial cap rates have potential to drift lower on strengthening fundamentals in PRV’s markets. Lowering the industrial cap rate by 25 bps would increase our NAV/unit by ~7%.
Attractive Valuation And Yield: PRV is trading at 11.3x 2022E FFO and a ~16% discount to our $7.50 NAV estimate. Our price target of $7.50 is in line with NAV. Units are yielding ~7.1% (forward AFFO payout ratio of ~85%) vs. diversified REITs at ~4.3% and industrial REITs at ~3.2%.
Our price target implies a total return of ~26%.