Post by
incomedreamer11 on Jul 29, 2021 9:12am
update from Scotia
Still 8%+ Distribution Yield; Valuation Support from Recent IPO in the U.S. Grocery-Anchored Space
OUR TAKE: Slight Positive.
Our target increases to $11.00 (from $10.00) and our SP rating is unchanged.
Our NAVPU increases to $10.80 (+$1.20) as we have adjusted our NAV cap rate lower to 7.25% (from 7.50%). This compares with an IFRS NAV cap rate of 7.00% and IFRS NAVPU of $12.55 (+19% y/y). We continue to think that the current distribution yield of 8.2% is attractive as we expect AFFO payout ratio to normalize to 95% in 2022. This compares with the CDN REIT sector average distribution yield of 4.0%
Valuation support from recent IPO in the U.S. grocery-anchored shopping center space: PECO, a large grocery-anchored shopping center owner in the U.S. with a portfolio fairly comparable to SGR's, completed its IPO in mid-July 2021 at an implied cap rate of 6.40% (our estimate). SGR trades at a 7.3% implied cap rate. S. Both own portfolios that are effectively 100% groceryanchored shopping centers with similar tenant profiles and located in somewhat similar markets. While PECO's in-place rents are much higher than SGR's, the implied cap rate spread is fairly wide at ~100bp. A 7% cap rate for SGR would imply NAVPU of $11.85
Overall, Adj. FFOPU came in at $0.21, in line with our estimate. We include subscription receipts in the total unit count.
Portfolio occupancy increased slightly to 93.2% (+10bp q/q) and 40bp higher than pre-pandemic levels. Grocery-anchored occupancy has stayed strong at 98.6%, while small-shop occupancy at 87.8% (down only 80bp from pre-pandemic and flat q/q). Q2 cash collections were 97%, similar to the 96%-97% range in the last three quarters. Management noted that 100% of rent deferred during the pandemic was collected. Leasing spreads have remained positive throughout the pan. We think open-air shopping centers have been beneficiaries (versus enclosed malls) during COVID-19, and as a result management is seeing a much more constructive leasing environment coming out of COVID than going into COVID. $390M portfolio acquisition to close in Q3/21: As previously disclosed, SGR is acquiring a sizable portfolio at 7.8% going-in yield (or $127 per sf). This transaction is part of a broader $2.3B acquisition by Slate Asset Management (SLAM) of U.S.- listed Annaly Capital Management's (NLY-N, not covered) commercial real estate business.
Pro forma leverage remains slightly elevated at 60% (D/Properties) – we expect management to remain acquisitive in the next 12 monthsQ2/21 Earnings Summary Q2/21 Adj. FFOPU came in at $0.21 vs. $0.26 last year (-10% y/y) and in line with our estimate of $0.21.
We have included subscription receipts in our calculation of FFOPU. Consensus was much higher at $0.24, as we suspect some analysts have not included subscription receipts in the total unit count. Overall, it was an in-line quarter and in line with our expectations on the key NOI metric. The impact of a sizable US$390M proposed acquisition will be seen in Q3/21 (and not in Q2/21 numbers), and as such we expect an uptick in FFOPU to $0.24 in Q3/21 and then $0.28 in Q4/21. We assume the portfolio transaction will be completed end of August 2021. Portfolio occupancy increased slightly to 93.2% (+10bp q/q), 40bp higher than pre-pandemic levels. Grocery-anchored occupancy (Exhibit 7) has stayed strong at 98.6%, while small-shop occupancy was 87.8% (down only 80bp from pre-pandemic and flat q/q). Q2 cash collections at 97%, similar to 96%-97% range in the last three quarters (SGR has fared in well compared with its U.S. peer group during the pandemic on the collection front). All of the REIT centers have remained open, with 100% of tenants in operation. IFRS NAVPU increased to $12.55 vs. $12.47 last quarter and US$10.95 in Q4/20. IFRS NAV has increased 19% on y/y basis. IFRS cap rate was adjusted to 7.00% in Q2/21 vs. 7.01% last quarter and from 7.34% in Q4/20. This is a reflection of increased buyer demand for grocery-anchored strip centers in private markets. Leasing momentum continued in Q2/21 with positive leasing spreads intact. SGR completed 171k sf of renewals and new leases at slightly higher than in-place rents (largely flat on renewals and up on new leases). We note 2.3% of SGR’s portfolio comes due this year (it was 5.2% last quarter), but there are no grocery anchor leases coming due in 2021. Despite the pandemic, SGR has successfully renewed its expiring leases. With an expected rebound in economic environment, SGR remains confident of a positive leasing environment in the next 12 months. We assume flat occupancy in our model. Leverage slightly elevated but down y/y. D/GBV (based on IFRS) was 53.0% in Q2/21 vs. 53.5% last quarter and 60% last year. Based on our NAV, we expect pro forma leverage to be ~60% post-closing of the announced $390M portfolio acquisition. We expect management focus to remain on acquisitions and as such expect leverage to be largely flat in the next couple of years.