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10% Yield From A Growing, Diversified And Undervalued Commercial REIT


PROREIT is a low-risk diversified commercial property REIT in Canada.

Attractive yield of ~10% with lowest valuation amongst comparable REITs (P/AFFO 17E of ~9x).

Excellent management team with a solid track record of value creation.

Investment Thesis

PRO Real Estate Investment Trust (PROREIT) offers investors an opportunity to invest in a diversified small cap. commercial REIT with a proven and aligned management team, while getting an attractive ~10% yield with opportunity for growth over time.

About PRO Real Estate Investment Trust

PROREIT is a small cap commercial REIT based in Canada and owns a portfolio of retail, industrial, and office properties predominantly located across New Brunswick and Quebec, with the remaining assets located in Nova Scotia, Ontario, and Alberta. Currently, PROREIT's portfolio consists of 33 properties totaling 1.7 million square feet of gross leasable area. With prior experience leading a large cap Canadian diversified commercial REIT, management aims to replicate its past success by building a portfolio of high quality commercial properties initially with a focus on Atlantic Canada, with later ambitions to expand PROREIT's presence nationally.

The REIT is headquartered in Montreal, Canada.

PROREIT trades on the Toronto Venture Exchange (PRV.UN) and has a market capitalization of ~C$75 million (or US$55 million).

The following slides provide a good high-level overview of the REIT:

Source: PROREIT Investor Presentation from November 2016.

3 Main Reasons to Buy PROREIT

  • Unique Market Position and Well-Diversified REIT: Dominant landlord in secondary and tertiary Atlantic Canadian markets. PROREIT's access to capital markets and a professional management platform are competitive advantages vs. smaller local landlords in each of the REIT's respective markets. While a large proportion of PROREIT's Maritime properties are located in smaller secondary and tertiary markets, most of the REIT's assets, particularly its retail properties, are located in the most important - often only - high-traffic commercial node(s) within each market. By targeting the high-quality assets in each market, PROREIT's properties are more defensive and should be well-positioned to retain and grow in value over the long term. PROREIT also has a well diversified tenant base with high quality tenants such as Shoppers Drug Mart, etc.
  • Excellent Management Team: The REIT is led by a capable and experienced management team that has demonstrated a track record of delivering unitholder returns. In the past, management has solid large cap Canadian diversified commercial REIT qualifications. CEO James W. Beckerleg and CFO Gordon Lawlor previously held the same positions at Canmarc REIT, a Canadian diversified commercial REIT which owned a portfolio of 143 properties totaling 9.4 million square feet concentrated in Quebec and Atlantic Canada. Notably, PROREIT's entire senior management team possesses extensive experience managing a diversified commercial property portfolio, having held similar roles at CANMARC REIT. With prior experience leading a large cap. Canadian diversified commercial REIT, the current management team aims to replicate its past success by building a portfolio of high quality commercial properties initially with a focus on Atlantic Canada, with later ambitions to expand PROREIT's presence nationally.
  • Strong Growing Cash Flow, Solid Yield and Attractive Valuation: The REIT has consistently grown cash flow and acquisitions are expected to continue to be the primary source of growth for PROREIT. Despite the smaller size of the markets in which PROREIT is concentrated, management are of the view that with a fragmented local ownership base, there remains ample opportunity to consolidate commercial properties into a professionally managed platform. Further, with higher cap rates for properties in smaller markets, PROREIT is able to lock in a higher spread, mitigating the comparatively higher risk profile and reduced liquidity of the smaller markets. Cash flow from operations is expected to increase in the high single digits in the next three years. PROREIT is trading at an ~8% discount to NAV compared to the peer weighted average of a ~0.5% discount, and at ~9x 2017E AFFO compared to the peer weighted average of ~13x. The current distribution yield is ~10% and implied cap rate is ~7.5%. Debt/GBV is manageable at ~65% and distribution payout ratio is ~95%.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PRV.UN over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.