Smart REIT upgraded by Desjardins after sell-off seen as overdone

FinancialPost.com
Nov. 28, 2016
Sean Craig

Smart Real Estate Investment Trust was upgraded Monday to buy by Desjardins Capital Markets, which said fears the stock is more bond-like than other Canadian REITs that led to a recent sell-off are too simplistic.

Maintaining its 12-month target price of $36, Desjardins says the stock is oversold and offers investors an attractive entry point due to the potential of SmartREIT’s low site coverage and the capital efficiency of its existing portfolio. The stock will open Monday on the TSX at $30.24.

Walmart is the Vaughan, Ont.-based REIT’s largest tenant, occupying approximately 40 per cent of its 31-million-square-foot portfolio and generating 27 per cent of its gross revenue. The average remaining term on its Walmart leases is eight years and Desjardins says there are multiple options, which favour the tenant, that could extend the terms for as much as 80 years, giving the company a relatively stable capital efficiency.

While management calls the stability Walmart provides “a blessing and a curse,” Desjardins says SmartREIT’s business model is capable of delivering annual same-property growth of 0.5 to 1.0 per cent.

The company has seen its occupancy rate slip from 99 per cent at the end of 2014 to 98.3 per cent at the end of the third quarter of 2016, as a result of Target’s withdrawal from the Canadian market.

Desjardins also says there is significant long-term upside potential due to SmartREIT’s existing land base, which includes five key urban development properties: the Vaughan Metropolitan Centre (VMC), Studio Centre, Westside Mall, Laval Centre and South Keys.

Desjardins further expects transactional income to become a greater part of the company’s operating results, as a result of many of its future residential properties being condominiums as opposed to rental, making for a potential boost to cash flows.