Plaza Retail REIT: Stock Analysis

This article was last updated on June 29, 2016.

About Plaza Retail REIT

Plaza Retail REIT logo

Plaza Retail REIT (TSX:PLZ.UN) is based in Fredericton, New Brunswick in Eastern Canada. It rents out retail properties such as strip plazas, single-use properties, and enclosed malls. Plaza’s unique business strategy drives its business via value-add opportunities to develop and redevelop retail real estate mainly in Eastern Canada.

Plaza Retail maybe a new name to you because it is a small REIT with a market capitalization of $473 million. On the Plaza Retail website, it states “Management owns a significant stake in the company.” So, the management’s interests are aligned with unitholders’ interests.

The REIT pays out monthly distributions that can be reinvested at a 3% discount if you enroll in the divistribution reinvestment plan. At $4.87 per unit, it yields 5.34% .

Retail Properties

At the end of Q1 2016, the REIT had interests in 302 properties, totaling 7.1 million square feet. Over half (exactly 51.9%) of Plaza Retail’s gross leasable area (GLA) is in Québec and New Brunswick. That said, as shown in the “Summary of Properties”, the GLA between the two provinces were diversified across 147 properties.

Plaza Retail REIT gross leasable area breakdown

Source data: Plaza Retail REIT Q1 2016 Report – p2

Plaza Retail REIT Properties Summary

Source: Plaza Retail REIT Q1 2016 Report – p2

Plaza Retail primarily leases to national retailers (90.5% of tenancy mix) with a focus on the consumer staples sector. So, the Target exit from Canada and the Future Shops to Best Buy rebranding has had little impact on Plaza Retail.

Property Type Breakdown

Most of Plaza’s square footage is strip plazas that are shopping malls consisting of stores and restaurants that are in well-populated areas.

Plaza Retail REIT property type

Source: Plaza Retail REIT Q1 2016 Report – p19

Plaza Retail has 24 projects under development or redevelopment. These will add about 1.5 million square feet to its portfolio. This pipeline should continue to drive growth.

Distribution Growth

Since November 2002, in the past 13 years, the REIT has increased its distribution every year. Only 2 Canadian REITs have achieved that. Canadian REIT (TSX:REF.UN) is the other REIT.

At $4.87 per unit, the REIT yields 5.3% at a sustainable payout ratio of 83.2% based on its funds from operations (FFO). In the past 5 years, it has hiked its payout at an annualized rate of around 3.9%. The last increase, which happened in January, was 4%.

Strategy

Here’s Plaza Retail REIT’s strategy from its Q1 2016 report.

The REIT strives to:

  • maintain access to cost-effective sources of debt and equity capital to finance acquisitions and new developments,
  • acquire or develop properties at a cost that is consistent with the Trust’s targeted returns on investment,
  • maintain high occupancy rates on existing properties while sourcing tenants for properties under development and future acquisitions, and
  • diligently manage its properties to ensure tenants are able to focus on their businesses

The REIT invests in these property types:

  • new properties developed on behalf of existing clients or in response to demand
  • well located but significantly amortized shopping malls and strip plazas to be redeveloped, and
  • existing properties that will provide stable recurring cash flows with opportunity for growth

How to Track Performance?

Management focuses on internal performance factors that it can control, including occupancy rates, rental rates, tenant service, and maintaining competitive operating costs.

However, there are external factors that it can’t control, such as the availability of new properties for acquisition and development, availability and cost of equity and debt capital, and a stable retail market.

Management uses these key metrics to track Plaza Retail’s performance:

  • FFO, AFFO, and the payout ratios based on FFO and AFFO: These help determine the safety of the distribution and the likelihood of future increases. A healthy, growing AFFO implies more cash is flowing through, and a sustainable payout ratio implies the distribution is covered.
  • debt service ratios, including the interest coverage ratio and debt service coverage ratio: These indicate how well the REIT is able to pay back its debt. The higher the ratios, the less likely the REIT will go bankrupt. In Q1 2016, the interest coverage ratio was 2.07x. In Q1 2016, it was 2.04x. The debt service ratio also is more solid at 1.51x in Q1 2016, while it was 1.55x in Q1 2015.
  • debt to gross assets
  • same-asset net property operating income
  • weighted average interest rate – fixed rate mortgages: In Q1 2016, the weighted average interest rate was 4.58%, 17 basis points lower than in Q1 2015.
  • occupancy levels: The higher the occupancy levels, the more secure the rental income is. Plaza Retail’s committed occupancy in Q1 2016 was 95.9% and in Q1 2016 was 96.3%.

Leasing and Occupancy

Plaza Retail REIT spaces out lease expiries. Here’s a table that shows its lease expiries for the next five years.

Plaza Retail REIT lease expiries

Source: Plaza Retail REIT Q1 2016 Report – p17

In the last two years, the REIT has maintained a committed occupancy of about 96%.

Top 10 Tenants

Based on rent revenues, Plaza’s 10 largest tenants are as follows:

Plaza Retail REIT Top 10 Tenants

Source: Plaza Retail REIT Q1 2016 Report – p19

Their rents represent roughly 58.5% of Plaza’s rent revenues. Shoppers Drug Mart devotes to almost a quarter of the REIT’s revenue but it is a strong national brand that is financially solid, so I’m not worried as a unitholder.

* Unless stated otherwise, information in this article is as of March 31, 2016

Tax Information

If you don’t mind tracking the cost basis, it’s actually tax-efficient to hold REITs in the non-registered (taxable) account if a large portion of their distributions is from return of capital. Essentially, the return of capital reduces the cost basis and so is taxed on the sale of the REIT units or until your adjusted cost basis becomes negative.

However, for small investors like me, I like to avoid the hassle of tracking the adjusted cost basis, so I hold PLZ.UN units in my RRSP. Though, there are no problems holding them in a TFSA either.

Conclusion

I like that Plaza is a small REIT, which has higher growth potential than bigger REITs. As well, it has a stellar record of increasing its distribution. Its shares are priced fairly today, as such, I expect its conservative long-term returns to be about 9%, lowballing its yield at 5% and its yield growth at 4%.

Lastly, if you do decide to buy Plaza Retail REIT units and use a limit order, remember to set it early in the day because it’s less liquid due to its size. It could take some time to fill your order depending on how many units you buy and how far you set the limit price from the market price.

References and Resources

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Disclosure: At the time of writing, I am long TSX:PLZ.UN.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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