Plaza Retail REIT's Unique Strategy Makes It A Great Addition
Growth, Long-Term Horizon, Value, Long Only
Contributor Since 2015
Summary
- Plaza is raising its distribution again (14th time in 13 years).
- Insiders own 22% of Plaza, aligning their interests with shareholders.
- Plaza's strategy is unique to traditional REITs, providing a different flavor of returns to your portfolio.
Note: All dollar figures in Canadian Dollars (CAD)
I am initiating coverage on Plaza Retail REIT (TSX: PLZ.UN) with a 12-24 month price target of $4.95 which translates into a return-to-target of 14.7% (9.4% in Stock Price Appreciation + 5.9% Yield). As of Dec-14-2015, Plaza's stock price is $4.55 per unit.
Investment Thesis
Historically, real estate returns have been less correlated with equity and bond returns which makes it a great tool to diversify your portfolio. But instead of adding the same REITs with the cookie cutter model of purchasing stabilized income-producing properties. Plaza's strategy focuses on adding value by creating value through redevelopment and adding excess density.
It has been a tough year for real estate equities, many REITs are trading at discounts. Now can be an attractive entry point for investors.
Company Overview
Plaza Retail REIT is a Canadian REIT who has ownership in 306 retail properties (~7.0 million sq. ft. of GLA) predominantly located in Eastern Canada. Their properties include strip malls, enclosed shopping malls, and stand-alone retail shops. 91% of their tenant base are national tenants.
Plaza's strategy is unique to the rest of the Canadian REIT universe. Instead of purchasing stabilized income producing properties, Plaza acquires, develops, redevelops, and adds excess density to create additional value and increase net asset value.
Involved and Well-Aligned Management
For over 29 years, CEO Michael Zakuta has employed a very hands-on approach and been involved in all aspects of real estate from developments to acquisitions. Not only does Plaza's management team has an impressive 15 year track record of acquiring and redeveloping properties but investors would like to hear that management also owns ~22% of Plaza REIT.
Mr. Zakuta, who owns ~13% of Plaza, has never sold a unit. Invested insiders is one of my favorite criteria to see in an investment. This way investors can be sure that management's interest are aligned with their shareholder's. This means looking after the long term interests of your investments and maximizing value.
Distribution
Similar to another company I covered, Plaza has systematically raised its distribution every year for the past 13 years. Currently Plaza pays a monthly distribution of $0.028 ($0.25 annualized) which at a current price of $4.55 is a 5.49% yield.
As of Q3 2015, management has approved a 4% increase in distribution for 2016 ($0.26 annualized).
Tenant Mix
After seeing companies like Target, Mexx, Future Shop, and Jacob leave the Canadian market place last year (~21 million square feet of vacant space), investors have to consider Canada's retail environment and how they may affect commercial REITs.
Plaza is well-positioned to weather a downturn in the Canadian retail market. Over 60% of their tenant mix is comprised of consumer staples, fast-food restaurants, grocery stores, and drugstores. All of these companies are more defensible and less cyclical.
Valuation
| Metric | Plaza Retail REIT* | Canadian Retail Average** | US Retail Average** |
| Market Cap ($million) | $409 | $1575 | $7372 |
| Implied Cap Rate | 7.2% | 6.1% | 5.8% |
| Dividend Yield | 5.9% | 5.6% | 3.8% |
| 2015E AFFO Payout | 84% | 87% | 66% |
| 2016E AFFO Payout | 13.8x | 14.9x | 17.9x |
| Prem/Disc to NAV | -5.4%*** | -2.6% | -7.0% |
| D/TEV | 55% | 45% | 31% |
| D/EBITDA | 10.3x | 8.2x | 5.7x |
* Source: Raymond James & Associates
** Source: Raymond James & Associates and SNL Financial Consensus
*** Based on a Q3 2015 market price of $4.35
Plaza has a more favourable Cap Rate and Dividend Yield compared to the Canadian Retail Average. Higher debt levels can be explained by Plaza's acquisition and redevelopment strategy which requires additional capital compared to a strategy that purchases stabilized income producing properties.
| NAV Calculation | Amount ($million) |
| Base NOI | $61.0 |
| Cap Rate | 7.2% |
| Estimated Value of Properties | 869.9**** |
| + Value of Other Assets | 119.3**** |
| = Total Assets | 989.2**** |
| - Net Debt | (553.2)**** |
| - Non-Controlling Interest | (3.7)**** |
| = NAV | 433.0 |
| Units | 92.8 |
| NAV per unit | 4.67 |
| Current unit price | 4.55 |
| Premium/(Discount) to NAV | (2.57%) |
**** Source: Raymond James and Associates
| Estimates | 2016E | 2017E |
| FFO per unit | $0.35 | $0.36 |
| AFFO per unit | $0.33 | $0.34 |
| P/FFO | 13.0x | 12.6x |
P/AFFO |
13.8x | 13.4x |
Currently Plaza trades at 13.0x forward P/FFO, 2.57% discount to calculated NAV of $4.67, and yields 5.9%. This gives investors value and downside protection.
A valuation of $4.95 reflects our 2016E AFFO trading at consensus 2016E P/AFFO of 15.0x.
Risks:
Development Risk - Company Specific
Plaza's strategy is to develop and redevelop properties by adding excess density. This requires considerable capital and long lead times. Plaza is subjected to development risks such as construction delays, cost over-runs, and failure to collect rent from tenants.
Economic Risk
An extended downturn in the economy will negatively affect consumer's disposable income and spending patterns affecting the profitability of retailers. Subsequently this can affect the stock price of REITs.
A depressed economy can also affect job growth which affects the demand retailers have for retail spaces. This may lead to higher vacancy rates, lowering the profitability of REITs.
Interest Rate Risk
REITs are historically negatively correlated with changes in interest rates. REITs are typically exposed to variable interest rates. Those REITs that rely on achieving a spread between its cost of financing and yields of acquisition/development will be negatively impaired in times of rising interest rates.
Tenant Risk
All REITs have tenant risk. Any negative change in tenant's credit-worthiness or in tenant portfolio can negatively affect a REITs revenues, profits, and subsequently, the stock price.
Conclusion
Alternative investments such as REITs give you diversified and less correlated returns to your traditional equity and bond portfolio. Plaza's unique strategy of acquisition, development, and redevelopment gives you a whole new flavor to your returns.
Plaza's strategy takes on more risk than purchasing stabilized income-producing properties but it also gives investors higher upside. Management execution is key and CEO Michael Zakuta has 30 years of experience in real estate and a 13 year track record executing this strategy at Plaza.
Currently trading at 2.57% discount to NAV and with a distribution that has seen annual increases, Plaza offers investors value and downside protection.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.