I'm tired of the SRU bs. Being posted to
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Passive Income Investor
I have concerns with your analysis of SRU. If you are an investor in retail real estate with future re development plans in mind, investing into SRU instead of REI is basically diversifying into secondary market space with far lower lease rates and most importantly FFO per square ft. It’s time to look into SRU closely.
#1 Based on the poor amount of data provided on development cap rate of SRU developments (likely on purpose compared to REI which is very transparent), the value creation SRU projecting from 32 million (in today’s dollars) of sqft and a value creation of ‘2 billion’ is about 67 a sqft. Compare that to a simple apartment building in Ottawa (latitude) where RioCan discloses 57% return on dev capital for residential (and this checks out using known NOI and cap rates) RioCan is creating 337 sqft of value. Assuming all RioCan developments will be the same, which they won’t be as the Toronto developments will create more value, for example the Well residential is likely 100% return on capital based on current rental rates in DT Toronto), SRU is creating 2 billion of value on 32 million sq ft while RioCan redeveloped the same 32 million in RioCan pipeline, the value creation would be 10.7 billion (RioCan actually has about 40 million in the pipeline, but I used 32m sqft to allow an apples to apples comparison.
You may ask yourself, why is SRU value creation not as strong? I would hazard a guess is that all these glorious redevelopments that SRU flouts, SRU only owns a small portion at about 25%. Note on the management report, it lists SRU actual interest below the big bold letters!
When looking at the financial statements, it is disclosed that SRU must partner with the executive chairman of the SRI boards private company (penguin).... that’s right, SRU cannot shop the market. A further interesting fact, is it appears SRU unit holders are lending the Executive Chairman’s private company money...... for an ‘unknown’ interest rates.
I ask, how can anyone value SRU future developments without knowing the costs at SRUs interest for each individual property? This appears to be a pattern at SRU about lacking disclosure. SRU recently decided to move away from from the standard cap rate and current NOI to determine NAV of income properties. They are moving too future discounted cash flows. So now management will decide what the expected future cash flow, which could result in an overvaluation of the NAV. I think analysis will pick this up. This is somewhat sketchy as the NAV of the organization will be on future cash flows projected by management. RioCan has external NAV audits on 25 properties per year to ensure fair NAV. I prefer not to value properties on looking into the future. It was also noted during the introduction of the 2020 annual audit by the auditors PWC that it had concerns with the how SRU is valuing its properties.
During the pandemic, SRU didn’t write down the properties value as much as RioCan did. This is odd as CBRE reports show secondary market cap rates dropped more than VECTOM. It’s hard to believe that SRU, which the same decline of rental income percentage didn’t need to write down as much or even more than RioCan. This could explain the move to back date the move to future discounted cash flow valuation model. The lack of regular external property valuations is concerning.
Now let’s look at some actual financials (vs reviewing the management report). Fact of the matter is, SRU AFFO has been over 100% since Q2. It might drop below 100% in q1 2021. With these grand plans, where is the money coming from? Likely dilution or more debt. Over 90% affo ratio is not sustainable and significantly handicaps the companies growth. REI was right to cut and the total return over the next few years is going to be incredible. I for one am glad to leave that 4c a unit in RioCan who can then use it to make 57% returns on development capital as that will rocket the Unit price NAV.
We always hear, ohh SRU increase distributions over last ten years and REI didn’t. That is correct, but you NEED to look at financials instead of reading yahoo charts. What the charts don’t tell you is that RioCan was shrinking from about 57m as ft to 35 sqft while still growing FFO. SRU was growing the entire time so I would expect FFO to grow. Now let’s go under the hood... between 2013 and 2020 FFO Per SQ FT of RioCan went from 9ish to 16. SRU went from 8 to 10. So on the surface, SRU looks great, but in fact, as RioCan divested secondary market, while FFO per sqft sky rocketed! This is about to become evident as RioCan ends divestment and starts growing. Coles notes, RioCan dropped 23mi sqft and still grew FFO! RioCan makes significantly more FFO per SQFT than SRU and is likely because Walmart has below market rents. FFO per sqft is the most under utilized metrics for REITs as if you are not generating the most FFO per sqft, owning space is pointless.
Recent data supporting RioCan VECTOM focus.... REI lease renewals 88% vs 77% from SRU, blended leasing spreads 5% Rio vs 3% SRU (ie RioCan is making more), avg lease rates 20 per sqft ft RioCan vs 15 for SRU. SRU has gotten away with ‘FFO growth narrative as RioCan was divesting ‘ and it’s about to turn around in a big way.
SRU does have some positives, the Executive Chairman of SRU who partners SRU with his own private real estate company (penguin) is a major insider buyer. He is doing this for a reason and it likely isn’t to help out the small time unit holders. The SRU board grants him an extremely disproportionate number of performance shares compared to other Canadian reits, he has SRU tied up in a development exclusivity agreement with Penguin (his private company) and SRU also lends his private company money... SRU unit holders are lending the executive chairman’s private company money.... and he is a billionaire... does that make sense to anyone on here?
Take advantage of the executive chairman’s insider buying that has pushed SRU outsized returns, reinvest into REI and forget about third best SRU (FCR is better). Look under the trunk before simply reading flashy presentations.
RioCan has way more valuable redevelopment, with 6x the value creation metrics, a proper distribution (instead of 100% + AFFO), higher lease rates, higher % of renewed leases, higher new,renewal and blended lease rates.
The end