Institutional Equity Research
August 6, 2014 Real Estate
CT Real Estate Investment Trust
Q2 FFO In Line; Strong Pace Of New Investments
Q2/14 FD FFO of $0.24/unit were in line with the $0.24/unit IPO forecast and our $0.24/unit estimate. Results were driven by post-IPO accretive acquisitions and better-than-forecast recovery of operating expenses, offset by higher-than-expected G&A expenses.
Occupancy remained 99.9%. In Q2, CT acquired seven properties
comprising 0.5 mln. sq. ft. for $94.0 mln. at 6.7% cap rate, and acquired two more properties since Q2 for $90 mln. at 7.3% cap rate. CT expects to complete four intensification projects comprising ~49,000 sq. ft. by Q1/15.
At Q2/14, debt/GBV assets was 48.1%, down from 50.0% at Q4/13. Weighted-average interest rate was 4.44%. With $9.8 mln. in cash and a $200 mln. credit facility, the REIT had total liquidity of $209.8 mln. at Q2/14, some of which funded subsequent acquisitions.
We rate CT REIT Sector Performer, reflecting its very high credit quality tenant profile, long-term leases and highly appealing property portfolio. Our 12- to 18-month price target is $12.00 or 12.5x 2014E FFO, modestly above our $11.50 NAV at a 6.1% cap rate.
Stock Price Performance
All figures in Canadian dollars, unless otherwise stated. 14-131007 © 2014
CIBC World Markets does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
See "Important Disclosures" section at the end of this report for important
Alex Avery, CFA, MRICS
Dean Wilkinson, CFA
12-18 mo. Price Target $12.00
CRT.UN-TSX (8/6/14) $11.20
Key Indices: None
3-5-Yr. AFFO Gr. Rate NA
52-week Range $10.00-$11.63
Units Outstanding 181.4M
Float 30.4M Units
Avg. Daily Trading Vol. NM
Market Capitalization $2,031.7M
Distribution/Distr. Yield $0.65 / 5.8%
Fiscal Year Ends December
Net Asset Value $11.50 per Unit
LT Debt $1,847.3M
Common Equity $1,957.7M
Convertible Available Yes
FFO Per Unit Prev Current
2013 -- 2014 $0.96E $0.96E 2015 $0.99E $0.99E P/FFO 2013 NM 2014 11.7x 11.7x 2015 11.3x 11.3x
AFFO Per Unit
2013 -- 2014 $0.72E $0.72E 2015 $0.75E $0.75E P/AFFO 2013 NM 2014 15.6x 15.6x 2015 14.9x 14.9x Company Description
CT REIT was formed by Canadian Tire Corporation to own and operate its real estate assets. The REIT owns 266 properties totalling over 19 million sq. ft.
CT Real Estate Investment Trust Sector Performer
CRT.UN-TSX 8/6/2014 Alex Avery, CFA, MRICS (416-594-8179) Alex.Avery@cibc.ca
12 - 18 month Price Target: Dean Wilkinson, CFA (416-594-7194) Dean.Wilkinson@cibc.ca
REIT Current Yield: 5.8% Brad Sturges, CFA (416-594-7399) Brad.Sturges@cibc.ca
Sector Weighting: Market Weight Market Cap. ($ mlns): $2,031.7 Sumayya Hussain, (416-594-7136) Sumayya.Hussain@cibc.ca
Price Target Calculation & NAV Company Description
CIBC 2014E FFO: $0.96
Target Multiple (2014E FFO): 12.5x
CIBC Price Target: $12.00
Implied 12-18 Month Total Return: 13%
CIBC NAV(E): $11.50 Strategy
Premium/(Discount) To NAV: (3%)
Cap Rate: 6.1%
Since IPO* YTD - 2014
Price Return 9.2% 2.6% Investment Thesis: Sector Performer
Yield 1.2% 3.5%
Total 10.4% 6.0%
*CRT began trading on Oct 23, 2013.
REIT Management Kenneth Silver – Chief Executive Officer and President Louis Forbes – Chief Financial Officer and Senior Vice-President www.ctreit.com
Earnings Summary Comparable Company Table
Financial Metric 2013A 2014E 2015E FFO MULTIPLES 2013A 2014E 2015E
Funds From Operations N/A $0.96 $0.99 CT REIT N/A 11.7x 11.3x
YoY Change N/A NM 3.1% Peer Group1
15.3x 14.3x 13.8x
Adjusted FFO N/A $0.72 $0.75 AFFO MULTIPLES 2013A 2014E 2015E
YoY Change N/A NM 4.2% CT REIT N/A 15.6x 14.9x
16.9x 15.8x 15.3x Note1: CWT.UN, CHP.UN, FCR, CRR.UN, and REI.UN.
Debt Maturity & Liquidity Profile (Q2/14)
Mlns 2014 2015 2016 Leverage Summary (Consolidated)
Class C LP Units $0.0 $200.0 $200.0 LEVERAGE SUMMARY Q2/14 Q4/13 Limit
Credit Facilities/Bank Debt $0.0 $0.0 $0.0 EBITDA Interest Coverage: 3.1x 3.0x 3.8x
Total $0.0 $200.0 $200.0 D/GBV (w/o convertible debt): 48.1% 50.0% 60.0%
Weighted Avg. interest rate on term debt 4.44% Lease Maturity Schedule
CT REIT average remaining lease term is 15.2 years
Cash & Equivalents $9.8 Undrawn Credit Facilities $200.0
Recent Occupancy History
Year Q1 Q2 Q3 Q4
2014 99.9% 99.9% N/A N/A
2013 N/A N/A N/A 99.9%
Recent Same Portfolio Accounting NOI Growth
Year Q1 Q2 Q3 Q4
2014 N/A N/A N/A N/A
Geographic Breakdown* (% of GLA) (At Q2/14)
Top 10 Non CTC-Tenants (At Q4/13)
Tenant GLA (mln sq. ft.) % of GLA No of Stores
146,438 0.8% 15 Overwaitea Food Group 39,213 0.2% 1 Best Buy / Future Shop 31,272 0.2% 1 Winners / Home Sense / Marshalls 30,048 0.2% 1 Sport Chek1
27,889 0.2% 1 Royal Bank of Canada 22,238 0.1% 4
$11.20 Per Unit $12.00 Per Unit
The primary goal of the REIT is to create unitholder value through leveraging its relations with CTC and generate predictable and growing cash flows. The REIT will seek to grow its asset base through acquiring eligible assets from CTC's remaining real-estate portfolio and third parties. The REIT expects contractual rent escalations and intensification activities to drive AFFO growth from its existing portfolio.
STRONG PAN-CANADA RETAIL ASSET BASE: The REIT's retail assets span from coast to coast across strong retailing locations across Canada. The REIT's largest tenant, CTC (97%+ of GLA/minimum rent), carries an investment grade credit rating and is one of the largest retailers in Canada.
CT REIT was created by Canadian Tire Corporation (TSX:CTC, CTC.a) to own and operate its real-estate assets. The REIT owns 266 properties totaling ~19.4 million square feet of GLA with close to all its base minimum rent being derived from CTC banner stores. The provinces of Ontario and Quebec make up over 60% in terms of GLA and minimum rent.
ATTRACTIVE AND FULLY COVERED YIELD: CT expects to payout ~90% of the AFFO annually which works out to a yield of ~6% which given the stability of the retail operations looks lucrative.
ACQUISITION OPPORTUNITY THROUGH CTC: CT has the ROFO on all of the CTC's remaining real-estate properties, management expects the majority of the 7.4 mln sq. ft of remaining CTC GLA to be eligible for the REIT's acquisition.
Quebec, 22.1% Ontario, 42.7% Atlantic, 9.8% 0.1% 0.0% 0.1% 0.3% 0.2% 0.1% 0.0% 0.1% 0.4%1.0% 5.9% 8.8% 8.0% 8.4% 10.7% 6.6% 9.8% 6.3% 8.6% 14.3% 10.3% -0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 33 '34 Sq . F t. (m illi on s) 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% % T ota l B ase M in. R en t
Q2/14 Results Consistent With IPO ForecastQ2/14 fully diluted (FD) funds from operations (FFO) were $0.24/unit, in line with the $0.24/unit IPO forecast and our $0.24/unit estimate. FFO reflected the positive impact of accretive acquisitions and above-forecast recovery of property tax and operating expenses, as well as higher interest income, offset by higher-than-forecast G&A.
NOI was +1.8% higher than forecast, driven by improved recovery of operating expenses and accretive acquisitions. Excluding straight-line rent adjustment, NOI was +1.5% higher than IPO forecast. Portfolio occupancy at Q2/14 was 99.9%, consistent with the occupancy at IPO. At Q2/14, Canadian Tire (CTC.A-SO) comprised 97.1% (18.9 million sq. ft.) of total GLA, with a weighted-average term of 15.2 years excluding renewals.
Acquisition & Development Activity
During the quarter, CT acquired seven properties comprising 0.5 million sq. ft. in Ontario, Alberta, Quebec, and Saskatchewan for $94.0 million at a weighted-average cap rate of 6.7%. These acquisitions were financed through $34.4 million in cash, $19.5 million through the issuance of Class B LP units to CTC, and $40.1 million in the issuance of Class C LP units to CTC.
Subsequent to quarter end, the REIT acquired two properties for $90.0 million at a weighted-average cap rate of 7.3%. The first property was a distribution center in Calgary comprising 201,000 sq. ft. of GLA, with a lease to CTC commencing in early 2015. The second was a 33.3% leasehold interest in Canada Square in Toronto. Canada Square is a 844,000 sq. ft. mixed-use property at Yonge and Eglinton, is home to CTC’s head office, and the land leases underlying the leasehold interest extend as long as 2071. Concurrent with the REIT’s investment, Oxford Properties also acquired a one-third interest. Funding for these investments included the REIT’s credit facility, the assumption of mortgages on the properties, and cash on hand.
Development is underway at two Canadian Tire stores in Charlottetown, PEI and St. John’s, NF, with completion expected by Q4/14. The REIT currently has four properties comprising ~49,000 sq. ft. of GLA, in various stages of intensification with planned completion dates between Q4/14 and Q1/15.
At June 30, 2014, debt to GBV was 48.1% as compared to 50.0% at Q4/13, and CT REIT’s interest coverage ratio was 3.1x, up from 3.0x at Q4/13. The REIT’s declaration of trust limits its ratio of total indebtedness to 60% of gross book value (GBV) or 65% including convertible debentures.
CT’s debt is entirely comprised of Class C LP units, totaling $1.847 billion at Q2/14, up from $1.8 billion at Q4/13 as a result of the issuance of additional Class C LP units in conjunction with the acquisition of eight properties year to date. These Class C LP units carry a weighted-average distribution of 4.44%. In addition to these Class C units, the REIT has a $200 million unsecured credit facility (which can be increased by $100 million under certain conditions), of which none was drawn as at June 30, 2014. At Q2/14, CT had $9.8 million of cash and equivalents.
Continues To Deliver On Plan
Q2 financial and operating results were consistent with expectations, reflecting the reliable, long-term nature of CT REIT’s leases with lead tenant CTC (accounting for 97.1% of base rent), its high occupancy, and attractive property portfolio.
From a strategic investment and growth perspective, CT has been active, acquiring seven properties for $94 million at an attractive weighted-average cap rate of 6.7% from CTC in Q2. Subsequent to the quarter, the REIT acquired another two properties for $90 million at a weighted-average cap rate of 7.3%, including the REIT’s notable acquisition of a one-third interest in Canada Square. We believe CT REIT is well understood by the market as having a highly predictable operating and financial outlook, a higher-than-average tenant concentration (Canadian Tire accounts for 97.1% of rent), and the longest lease term in our coverage universe. While management has a proven track record of active asset management and long-term value creation, we believe the market has been cautious to ascribe value to the REIT’s ability to surface hidden value from underutilized owned or newly purchased properties, until the REIT executes on such opportunities. We view the REIT’s investment in Canada Square as a high-profile opportunity for the REIT, along with its partners, to demonstrate strong value creation in a prime location.
We believe CT REIT’s highly defensive and consistent operating and financial profile make CT REIT a core holding for a broader audience of investors than many traditional Canadian REITs, including income-oriented investors that may invest in fixed income, preferred equities, and other income producing
investments. As the REIT continues to build its track record as an opportunistic acquirer, and value-creating developer, we expect the REIT’s units could be revalued higher on a relative basis, reflecting an enhanced growth profile. We expect the REIT to provide attractive and, over time, growing distribution income yield with a high degree of stability and predictability, with the potential for meaningful value creation.
Price Target Calculation
At $11.20, CT REIT trades at 11.7x 2014E FFO, a 3% discount to our
conservative $11.50 NAV estimate (at a 6.10% cap rate), and yields 5.8%. Our 12- to 18-month price target is $12.00, or 12.5x 2014E FFO, and 4% above NAV. We continue to rate CT REIT Sector Performer.
Key Risks To Price Target
Company-specific risks include: extremely high tenant concentration and credit exposure to Canadian Tire Corporation; potential non-renewals of leases by Canadian Tire upon expiries; competition from, or the oversupply of, other similar properties, among others. General risks include the potential for an unanticipated increase in interest rate, the diversion of investors’ capital flows away from high yielding real-estate equities toward other asset classes, and the functional obsolescence of real estate.
Our FFO estimates are shown below:
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly
2013 Current -- -- -- -- --
2014 Prior $0.24A $0.24E $0.24E $0.24E $0.96E
2014 Current $0.24A $0.24A $0.24E $0.24E $0.96E
2015 Prior $0.25E $0.25E $0.25E $0.25E $0.99E
2015 Current $0.25E $0.25E $0.25E $0.25E $0.99E
Our AFFO estimates are shown below:
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly 2013 Current -- -- -- -- -- 2014 Prior -- -- -- -- $0.72E 2014 Current -- -- -- -- $0.72E 2015 Prior -- -- -- -- $0.75E 2015 Current -- -- -- -- $0.75E
Analyst Certification: Each CIBC World Markets research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed by such research analyst in this report.
Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets are compensated from revenues generated by various CIBC World Markets businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.
In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.
Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Important Disclosure Footnotes for CT Real Estate Investment Trust
2a CT Real Estate Investment Trust is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for CT Real Estate Investment Trust in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from CT Real Estate Investment Trust in the past 12 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from CT Real Estate Investment Trust in the next 3 months.
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered
by CIBC World Markets Inc.:
Stock Prices as of 08/06/2014:
Calloway REIT (2a, 2c, 2e, 2g) (CWT.UN-TSX, $26.17, Sector Performer)
Canadian Tire Corporation, Ltd. (2g, 7, 13) (CTC.A-TSX, $104.53, Sector Outperformer) Choice Properties REIT (2a, 2c, 2e, 2g) (CHP.UN-TSX, $10.90, Sector Performer) Crombie REIT (2a, 2c, 2e, 2g) (CRR.UN-TSX, $13.34, Sector Performer)
First Capital Realty Inc. (2a, 2c, 2e, 2g) (FCR-TSX, $19.03, Sector Performer) Loblaw Companies Limited (2a, 2c, 2e, 2g) (L-TSX, $53.05, Sector Performer) RioCan REIT (2a, 2c, 2e, 2g, 7) (REI.UN-TSX, $26.98, Sector Outperformer)
Royal Bank of Canada (2a, 2b, 2c, 2e, 2g, 3a, 3c, 7) (RY-TSX, $79.73, Sector Performer) Tim Hortons, Inc. (2g, 7) (THI-TSX, $64.52, Sector Outperformer)
Companies Mentioned in this Report that Are Not Covered by CIBC World Markets Inc.:
Stock Prices as of 08/06/2014:
Best Buy Co. Inc. (BBY-NYSE, US$29.57, Not Rated)
Boston Pizza Royalties Income Fund (BPF.UN-TSX, $20.30, Not Rated) PetSmart, Inc. (PETM-OTC, US$67.71, Not Rated)
TJX Companies, Inc. (TJX-NYSE, US$53.91, Not Rated)
Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.
Key to Important Disclosure Footnotes:
1 CIBC World Markets Corp. makes a market in the securities of this company.
2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.
2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months.
3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.
3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.
4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities-related services in the past 12 months.
4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.
4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months.
5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities.
5b A member of the household of a CIBC World Markets Corp. research analyst who covers this company has a long position in the common equity securities of this company.
6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities.
6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company.
7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.
8 An executive of CIBC World Markets Inc. or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months.
9 A senior executive member or director of Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries.
10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company.
11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting sha res. 13 The equity securities of this company are non-voting shares.
CIBC World Markets Inc. Price Chart
CIBC World Markets Inc. Stock Rating System
Abbreviation Rating Description
SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months.
SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.
SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months.
NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock.
R Restricted CIBC World Markets is restricted*** from rating the stock.
O Overweight Sector is expected to outperform the broader market averages.
M Market Weight Sector is expected to equal the performance of the broader market averages.
U Underweight Sector is expected to underperform the broader market averages.
NA None Sector rating is not applicable.
**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada.
"Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues. ***Restricted due to a potential conflict of interest.
Ratings Distribution*: CIBC World Markets Inc. Coverage Universe
(as of 06 Aug 2014) Count Percent Inv. Banking Relationships Count Percent
Sector Outperformer (Buy) 151 40.4% Sector Outperformer (Buy) 145 96.0%
Sector Performer (Hold/Neutral) 181 48.4% Sector Performer (Hold/Neutral) 169 93.4%
Sector Underperformer (Sell) 37 9.9% Sector Underperformer (Sell) 31 83.8%
Restricted 4 1.1% Restricted 4 100.0%
Ratings Distribution: Real Estate Coverage Universe
(as of 06 Aug 2014) Count Percent Inv. Banking Relationships Count Percent
Sector Outperformer (Buy) 20 42.6% Sector Outperformer (Buy) 20 100.0%
Sector Performer (Hold/Neutral) 25 53.2% Sector Performer (Hold/Neutral) 25 100.0%
Sector Underperformer (Sell) 1 2.1% Sector Underperformer (Sell) 1 100.0%
Restricted 1 2.1% Restricted 1 100.0%
Real Estate Sector includes the following tickers: AAR.UN, ACC, ACR.UN, AP.UN, AX.UN, BEI.UN, BOX.UN, BRE, CAR.UN, CHP.UN, CRR.UN, CRT.UN, CSH.UN, CUF.UN, CWT.UN, D.UN, DIR.UN, DRG.UN, DRM, EXE, FCR, GRT.UN, HLP.UN, HOT.UN, HR.UN, IIP.UN, INN.UN, KMP, LW, MR.UN, MRC, MRG.UN, MRT.UN, MST.UN, NPR.UN, NWH.UN, PAR.UN, PLZ.UN, REF.UN, REI.UN, RLC, RMM.UN, RUF.U, SMU.UN, TCN, TN.UN, WIR.U.
*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc. do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Perfor mer, and sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.
Important disclosures required by IIROC Rule 3400, including our system for rating investment opportunities and our dissemination policy, can be obtained by visiting CIBC World Markets Inc. on the web at
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