Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week an Inner Circle member asked Pat a question about real estate investing, specifically the prospects of a firm that owns malls across Canada. Plazacorp recently acquired a REIT which increases its presence in Western Canada, but its operations remain heavily concentrated in Atlantic Canada. Pat assesses the company’s geographic risk as well as its heavy reliance on its main tenant, Shoppers Drug Mart.
Q: Hi Pat: May I have your analysis on Plazacorp Retail Properties? Thank you.
A: Plazacorp Retail Properties Ltd. (symbol PLZ on Toronto; www.plaza.ca), owns strip malls and enclosed shopping malls across Canada. Plazacorp owns interests in 347 properties, which together contain 6.6 million square feet of leasable area.
On July 2, 2013, the company’s shares moved from the TSX Venture Exchange to the Toronto exchange.
In June 2013, Plazacorp completed its acquisition of KEYreit, which held 228 retail properties, mainly in western Canada. The company paid $121.9 million in cash ($62.1 million) and shares ($59.8 million) in shares for KEYreit.
Even after this purchase, the Atlantic provinces still account for 61% of the company’s square footage, followed by Quebec (26%), Ontario (11%) and western Canada (2%). The trust’s occupancy rate is 94.5% at the strip malls and 91.4% at the enclosed malls. National and regional chains, such as Shoppers Drug Mart, Dollarama and Staples, account for 92.5% of the Plazacorp’s tenants.
Plazacorp could lose with Loblaw takeover of Shoppers Drug Mart
Thanks partly to the new KEYreit properties, Plazacorp’s cash flow in the three months ended September 30, 2013 rose 29.8%, to $5.3 million from $4.1 million a year earlier. Due to more shares outstanding, cash flow per share rose just 1.5%, to $0.068 from $0.067. If you exclude certain one-time acquisition expenses, cash flow per share would have risen by 7.1%, to $0.072.
The company recently received approval from the Canada Revenue Agency to convert to a real estate investment trust, effective January 1, 2014. If shareholders approve, they will receive one unit in the new REIT for each share they hold. Following the conversion, Plazacorp will also switch to monthly distributions.
Following the KEYreit purchase, Shoppers Drug Mart (symbol SC on Toronto) is now Plazacorp’s largest single tenant, accounting for 24.7% of its rental income. Loblaw Companies Ltd. (symbol L on Toronto) aims to complete its takeover of Shoppers in early 2014. Loblaw may decide to move some of the Shoppers stores in Plazacorp’s malls to properties held by its 82.2%-owned Choice Properties REIT (symbol CHP.UN on Toronto).
Plazacorp recently raised its quarterly dividend by 6.7%, to $0.06 a share from $0.05625. The new annual rate of $0.24 yields 5.3%.
In the Inner Circle Q&A, Pat balances the risk of Plazacorp’s concentration in one region of the country and its reliance on Shoppers Drug Mart against its rising cash flow and dividend. He concludes with his clear buy-hold-sell advice on this stock.
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