It has been the case for several years now that Canadian REITs that operate in multiple sectors (residential, office, retail, industrial, and others) are valued lower than REITs that only own one type of building. The COVID-19 pandemic has accelerated this even further, as those learning how to buy stocks in Canada are gravitating towards more “stay at home” plays while retail, commercial and office sectors suffer.
Investors like picking REITs within a sector. If the investor doesn’t want to own any retail real estate for example, they don’t have to. If they buy a diversified REIT, they are stuck with whatever the REIT’s management wants to own.
Cominar REIT (TSE:CUF.UN) is a diversified REIT.
It owns office buildings, shopping malls, and industrial/flex buildings.
Because it owns buildings in three sectors, it is trading much cheaper than the sum of its parts.
Cominar (TSE:CUF.UN) is trading at roughly 8x 2019’s FFO and 10x AFFO.
So called pure play REITs, even those in an out of favour sector like retail, are trading at higher multiples.
The company is the largest commercial real estate property owner and manager in Quebec, with total leasable space of nearly 36 million square feet, 314 properties, and an overall occupancy rate of 93.8%.
In terms of allocation of that total space, the company has the following:
- 11 million square feet of office space
- 9.5 million square feet of retail space
- 15.4 million square feet of industrial/flex space
The company’s share price has taken a dive over the last 8 years, with a compound annual growth rate of -11.57% over that 8 year stretch. Over the course of 2019 however, the company was on a consistent upwards trajectory. And then of course, COVID-19 hit.
The pricing phenomenon provides investors two opportunities
First, if the market’s preference shifts, diversified REITs should trade at higher multiples. Cominar REIT should trade at a multiple that reflects the different types of real estate it owns, a multiple between that of retail and industrial real estate. Some REITs aren’t as diversified, such as Canadian Tire’s REIT, CT REIT (TSE:CRT-UN).
Instead, Cominar trades at a discount to all sectors.
Second, large discounts present management teams with multiple ways to create value.
One of the ways management can be forced to create value is when an activist invests in the REIT. That is what is going on at Cominar right now.
In September Cominar announced a strategic review to look at “potential strategic alternatives available to it with a view to continuing to enhance unitholder value”. It appointed a group of Trustees, including Zachary George of FrontFour Capital, to oversee the process.
What actions Cominar takes are unknown, but there are a few common moves REITs make
During a strategic review, it is implied that the REIT is for sale. It is always possible that the REIT could be acquired.
REITs often conclude to sell properties. Because most REITs doing a strategic review are trading below their net asset value (NAV), if they can sell an asset at its book value, it immediately creates value and if done enough should result in the NAV discount shrinking.
With the cash received from selling assets, REITs may pay down debt, develop properties in higher demand sectors (like industrial right now), or buy back units while they are cheap.
All of these are options for Cominar.
Cominar REIT owns shopping centres which are performing pretty well through the pandemic (they collected 90% of retail rents in the third quarter) but are not highly valued in the public markets.
It makes sense to sell its retail properties, since the market price of Cominar is not implying much value from the retail properties.
Alternatively Cominar could sell one or more of its trophy assets, which would fetch high prices in a sale. One example is Gare Centrale, a great development site with 1.7 million square feet of gross leasable area in downtown Montreal.
With any cash from asset sales, Cominar could fund a buy back of its units. Cominar REIT is trading at a 43% discount to NAV, so buybacks are a great value.
The REIT could also pay down debt. The balance sheet is on the risky side at 54.4% debt-to-assets. Most REITs stay under 50%, so paying down debt could make the market happy and lead to Cominar’s unit price increasing.
Finally, Cominar could fund its development pipeline. Management has identified 10 properties that they think could support 10,000 apartment units, as well as land on which it could build 1 million square feet of industrial properties.
Zachary George has a history of working with companies to maximize shareholder value
Zachary George, mentioned above, has a history of working with companies to maximize value for shareholders. FrontFour Capital owns 8.4% of Cominar, so George is incentivized to get Cominar’s price up.
But FrontFour isn’t the only activist investor involved. George Armoyan, the famed activist Chairman of Clarke Inc, owns over 10% of Cominar. It is likely that Armoyan is communicating ideas to the committee.
One activist working to make changes at a company is good. Two is great.
Even if nothing results from the strategic review, Cominar REIT is cheap enough that unitholders will still do well. It is trading at a 43% discount to NAV, before March the discount was less than 10%. 10x AFFO is also very low for a REIT of Cominar’s quality.
Cominar has strong assets that will grow AFFO in the coming years, with lots of development potential, and is concentrated in a good real estate market (Montreal and Quebec City).