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November 10, 2020

Plaza Retail REIT (TSE:PLZ.UN) – Not All Retail is Dead

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Tyler Kirkpatrick

November 10, 2020

Plaza REIT

 

Any Canadian REITs with “retail” in its name has scared off investors this year, and for good reason.

Even before the COVID-19 pandemic, it was clear that malls and other retail real estate would become less valuable as more and more retailers moved their businesses to the internet. The lockdowns this spring and summer have only accelerated the transition to e-commerce, making brick and mortar retail even more undesirable to investors.

In the rush to sell retail exposure, the market has oversold REITs that can actually benefit from the collapse of weak retailers. Plaza Retail REIT (TSE:PLZ.UN) is one of those.

 

What is Plaza Retail REIT (TSE:PLZ.UN)

Plaza Retail REIT is one of Canada’s leading property owners with a total asset value of over $1 billion. The company specializes in both retail property and quick service restaurant properties.

The majority of the company’s properties are in the provinces of Ontario and Quebec (45.9%) and over 90% of the company’s gross rents are from nationwide retailers like Starbucks, Tim Hortons, Staples, Sport Check, Sobeys, Dollarama, Canadian Tire and many more.

Why Plaza Will Benefit?

The first reason Plaza will benefit is the company owns the type of real estate that is open and doing business right now, and has been open through most of the pandemic. Plaza almost exclusively owns open-air strip plazas or single-tenant quick service restaurants.

While not all of its tenants were open this spring and summer, Plaza leases a lot of space to grocery stores, pharmacies, and restaurants that have drive-through service and/or a focus on takeout orders. Those are the tenants that have survived during the COVID-19 crisis.

 

Plaza Retail REIT Top 30 Retail Tenants Late 2020

Plaza Retail REIT

From Plaza.ca investor relations page.

 

The company also creates a lot of value by developing and redeveloping properties. It has bought several enclosed malls in the past and redeveloped them into strip malls. By removing the common space, it is able to make the properties more profitable since it costs money to maintain the common areas of the mall but they don’t bring in revenue.

Plaza has also taken malls that have a large vacant space, like former Sears or Target locations, and redeveloped those empty stores into multiple smaller spaces, which rent for more per square foot and are easier to lease out.

In the event that a shopping centres decreases in value, or they are facing tenant bankruptcies, Plaza will have the opportunity to acquire properties at low valuations, which will fuel its future growth.

 

Valuation

Even though it is positioned to be a relative winner from the pandemic, the market isn’t valuing Plaza accordingly.

In 2019, Plaza earned $0.40 in funds from operations (FFO), which is essentially a REIT’s earnings.

That was 19% higher than 2018 FFO, showing that Plaza can grow even in a tough environment. Remember, retail real estate has been under pressure for years now, so 19% growth last year is impressive.

In comparison, Riocan REIT grew FFO just 1% in 2019.

Through two quarters in 2020, Plaza earned almost $0.17 in FFO. But Plaza used the COVID-19 situation to buy out tenants from their leases and without those expenses FFO would have been up 2.8% year over year, or $0.21.

Meanwhile, occupancy on June 30th 2020 was close to the occupancy a year before: 96.2% in 2020 vs. 96.7% in 2019.

Given the growth and occupancy being steady, 2019 should be a good baseline for Plaza Retail REIT’s future earnings power. 2021 FFO will most likely be at least equal to 2019’s.

Plaza is trading at 8.4x 2019’s FFO. Even if we use 2020’s reduced FFO – annualizing the FFO from the first half of the year would mean $0.34 FFO for the full year – Plaza is trading at less than 10x FFO.

For a growing REIT with the bright future Plaza has, that is cheap.

Plaza REIT

Charts provided by StockRover. Check out Stockrover Here!

Market Cap: $341 million
Yield: 8.36%

 

Plaza’s High Yield is Safe

Plaza Retail REIT pays out an 8.4% yield. A lot of the time, a yield that high indicates the payout isn’t safe or that the stock/REIT may not have much growth potential. This is not the case for Plaza though.

In 2019, Plaza’s FFO payout ratio was just 71%. Even in the first half of 2020, in what was almost a worst case scenario, the payout ratio was 85%.

Better yet, management realizes the market is undervaluing it, so they use extra cash flow to buy back units. In the first half of 2020, management bought back almost 400,000 units, or roughly 0.4% of units outstanding. Not many REITs out there take advantage of their units being cheap to conduct buybacks.

 

Conclusion

Plaza Retail REIT, despite its name, is going to be one of the winners coming out of the pandemic. It has a history of transforming poor malls and turning them into high performing shopping plazas. In the meantime, investors will likely receive capital gains because of Plaza’s low valuation, and will receive an 8+% yield as well. Plaza Retail REIT would be a good addition to your portfolio whether you are looking for capital gains, or income.

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Tyler Kirkpatrick


Tyler is an individual investor and has been investing in stocks, REITs, and private real estate for over 10 years. He focuses on companies with high quality assets that are trading with a margin of safety.

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