RioCan Real Estate Investment Trust T.REI.UN

Scotia comments after conference

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Growth vs. Value Trade-Off Continues

OUR TAKE: Mixed. We maintain our SO rating as earnings season evolves (our NTM 27% TR > 23% sector avg.), but our key estimates fall 0%-3% (Exhibit 1), mostly on higher interest expense ($3.7M lower q/q capitalized interest; Exhibit 13). Our prior est. y/y recurring FFOPU growth of 3%-5% for 2024 (see Initial Glance) is closer to 2%-3% on guidance assumption clarity, incl. assumed lease termination fees and CAM/Tax recoveries (Exhibit 2). Q4 = the 3rd consecutive Q with a “Mixed” Our Take as an attractive valuation is offset by lower near-term growth prospects. We think REI is doing many things well, as evidenced by strong lease spreads (Exhibit 9) amidst peak occupancy (Exhibit 10), with development EBITDA and condo gains driving net debt/EBITDA to ~8x in 2025 (vs. ~9.25x today); spinning-off the Resi = ~7x. That said, higher rates are a foe to near-term FFOPU growth; REI has the most debt coming due at the 2nd lowest avg. rate (Exhibit 3; similar to KMP amongst Apartments), leading to a higher PEG ratio ex. gains (Exhibit 4). We see limited AFFO multiple downside (Exhibit 7), supporting 10%+ TRs over time (6% yield + 2%-3% AFFOPU CAGR + multiple recovery).

KEY POINTS

What’s new? First, our view on recurring 2024E FFOPU growth. We clarified REI FFOPU guidance ($1.79-$1.82) includes ~$0.025 of lease termination fees and CAM recoveries (we back out). As a result, our revised 2024E y/y FFOPU incl. and ex. resi condo gains = ~2% and ~3%. Our 2024E gains double to ~$23M. We lowered our target multiple 0.25x to 13.75x post a 1.5x decline in Q3 (historical AFFO yield spread to 10YR would warrant at least 14.0x; Exhibit 5) but expect to reverse it on lower leverage through 2024. REI acquired a stabilized Apartment in Q1 (50% stake for $53M; CBRE Calgary Class A cap rate = 4.75%-5.0%), recycling capital from an $155M retail asset sale in Surrey (probably at a similar cap rate). We’re not fans of REI allocating capital to stabilized Apartments when debt reduction is both appealing and accretive (to earnings, but also to trading multiple), but we get the benefits of scale for 2026+ (i.e., Resi IPO, etc.) and good IRRs on low in-place debt costs.

Call highlights. REI noted the shift in focus to more near-term (2024) guidance and away from its original 5-year guidance in 2022 (different world; rates much higher). On capital recycling, no 2024 disposition target as the residential land market is tough (H&R REIT noted on its c/c Toronto subway path land values are $150-$200/buildable sf vs. peak of $325/sf). We feel investors want more active asset dispositions from Retail REITs (which we think explains some of the recent FCR outperformance) as higher-for-longer rates render prior net debt/EBITDA targets insufficient (i.e., acceptable two years ago = 9x; now 8x in Retail). REI believes tenant demand is so strong that it welcomes vacancy (i.e., rent MTM), which it should get with 5 Rooms+Spaces (former Bed, Bath, and Beyond) locations coming back (recall, REI had 13 BBB locations at an avg. ~$17/sf net rent for $8M total rent), of which 2 have been leased to grocery stores. 2024 Guidance calls for flat y/y occupancy, $20M-$25M of resi gains (2023A = $17M) and avg. debt refi rate of 5.64% and no acquisitions/dispositions.