SmartCentres is a Canadian retail real estate investment trust (REIT) specializing in unenclosed retail shopping centres listed on the TSX symbol SRU.UN and CWYUF OTC.
SmartCentres owns and manages 34.2 million square feet of income producing real estate and 3500 acres of land in Canada. It is developing its properties through intensification projects to take them from primarily retail developments into mixed use communities diversifying into the residential sector through its Smart Living division.
SmartCentres offers an attractive 7.4% annual dividend yield in addition to capital appreciation and is one of the largest positions in my portfolio. The business is currently available at a discount in a difficult retail environment in the middle of a pandemic. I believe it is a fairly conservative investment that offers high potential returns with relatively low risks.
The investment is closely linked to the earning power of the business and offers investors reasonably predictable future revenues with a 4.6 year average lease term and the obligation to pay out the majority of earnings in dividends.
Portfolio Stats, Tenant Mix, Occupancy Rate
· 34.2 Million SQ. FT. Leasable Space in major Canadian markets.
· Strong 97.3% Occupancy Rate.
· 73% of properties anchored by Walmart.
· Weighted Average Interest Rate: 3.28% (has been declining over last 3 years)
· Diversified Tenants mix anchored around Walmart (25% of Gross Rental Revenue) followed by Canadian Tire (4.7%) and then spread out over more than 25 corporate tenants.
Tenant Breakdown
SmartCentres REIT 2020 Q4 MD&A
Moats / Competitive Advantage
· Walmart Anchor Tenant Strategy (115 Walmart Anchored Centres)
· 3500 Acres of strategic land holdings
· Large intensification and development pipeline
· Experienced development and management team
Dividend Yield and Payout Ratio
SmartCentres currently offers a 7.4% Dividend Yield and has a 98% 2021 Payout Ratio. The high payout ratio highlights the risk of a potential dividend cut, however, the organization has navigated an extremely difficult covid retail environment while maintaining high occupancy rates, the dividend and generating $2.20 in funds from operations.
Valuation
SmartCentres has an attractive valuation with a price 17% below net asset value and has a price to funds from operation ratio of 12 that is significantly below the 14 P/FFO (price/funds from operation) historical index average.
($25 Price / $30 Net Asset Value) = 0.83
$25 (Price) / $2.20 (P/FFO) = 12 P/FFO
12 P/FFO vs. 14 P/FFO Historical Index Average 14 P/FFO Multiple x $2.20 FFO = $30.8 Implied Value
Risks vs. Rewards
The risk reward ratio is highly desirable with fairly low risks accompanied by high income and capital appreciation. In the event of a dividend cut the income that was cut would be retained by SmartCentres to reinvest into the development pipeline to increase NAV and FFO.
Biggest Risks
25-50% Dividend Cut (Medium), Prolonged Commercial Real Estate Crash (Low)
Rewards
Dividend Yield (7.4%/Year) + Discount to NAV (17%) + Future Growth /Development Pipeline
Development Pipeline, Expertise + Transactional FFO SmartCentres is currently using less than 24% of its land with 2775 unbuilt acres of land resulting in a large development pipeline with 6.7M square feet currently under development, an additional 9.5M square feet in its medium-term development pipeline and 16.3M square footage in its long-term development pipeline. This gives SmartCentres a clear runway to grow.
Smart Centres has a 160 person development team and has completed 60 million square feet of development since 1989. The development pipeline is designed to create both recurring revenue (77%) and transactional FFO through development income (23%).
High Performance Wealth and Income Creation Machine
SmartCentres has been increasing assets and generating value steadily since 2002 at a 29.3% compound annual growth rate. The annualized distributions have also been increasing going through periods of growth in 2003-2007 and 2014-2019. Its long term historical ability to generate income and increase net asset value makes SmartCentres a desirable investment.
SmartCentres REIT Q3 2020 Investor Presentation
Smart Centres has consistently outperformed the TSX Capped REIT Index (XRE) and the TSX from 2003-2021. It has returned unit holders an average of 12.9% a year since the IPO.
SmartCentres REIT Q3 2020 Investor Presentation
High Insider and Institutional Ownership
Mitchell Goldhar, the chairman and founder of SmartCentres currently owns 10.39% of the shares and he purchased 941,200 shares for $18,823,212 in 2020 after the March covid crash. This works out to an average purchase price of $20 a share.
This founder/chairman is strongly aligned with shareholders and continues to regularly purchase large amounts of shares showcasing his personal conviction in the organization. My capital feels very comfortable investing alongside such an invested, dedicated and experienced chairman. 10.6% of the shares are owned by insiders. 28.4% of the shares are owned by institutions. 61% of the shares are owned by the general public.
Long Term Trends / Headwinds / Tailwinds
Inflation - SRU can capture inflation through rent prices and asset prices. - Tailwind
Immigration - Tailwind
Interest Rates – Tailwind
Highway/Transportation Infrastructure - Tailwind
Population Growth Rate of Greater Toronto Area – Tailwind High Spread between SRU.UN dividend yields and bond yields - Tailwind Lockdowns/Stay at Home Orders/Covid Restrictions – Short Term Headwind
E-Commerce Shopping- Headwind
Disclosure: I am long SRU.UN and this is for informational purposes only and is not professional investment advice!
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