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Introduction
I believe there is significant value to be found in the Canadian REIT sector, particularly in retail, residential, and industrial spaces. I have been closely monitoring several Canadian REITs, including Plaza Retail REIT (TSX:PLZ.UN:CA) (OTC:PAZRF). I previously held the convertible debentures of Plaza Retail REIT, but the REIT repaid the debentures on the maturity date. While I am pleased that the REIT survived the challenges of the COVID pandemic, I also appreciated the decent coupon from a well-managed REIT. However, with increasing interest rates in the financial markets, Plaza Retail is facing higher debt costs, prompting me to closely watch its quarterly performance to ensure the generous dividend remains secure.
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This article serves as an update to previous articles, which can be found here.
The Q1 Performance
Looking at the Q1 performance, Plaza Retail’s assets are performing as expected. The REIT recorded a year-over-year net increase of approximately 3.8% in same-asset net operating income, reaching C$17.8M. Additionally, Plaza Retail invested in additional space, with specific general and administrative expenses impacting the NOI performance. These expenses added close to a million Canadian dollars to the NOI result, totaling approximately C$18.05M.
When evaluating a REIT, the FFO and AFFO results are more crucial than net profit. Plaza Retail saw a significant increase in its FFO performance, rising by almost 6% to C$9.9M from the first quarter of the previous year. This translated to an FFO per share of approximately C$0.089, in line with the previous year’s performance. However, the AFFO result decreased by around 10% to C$7.3M, indicating an AFFO of C$0.066 per share. The increase in maintenance capex and leasing costs in Q1 weighed on the AFFO result.
I anticipate these costs to trend downward in the coming quarters, leading to an increase in AFFO. The Q1 AFFO was insufficient to cover the monthly dividend of C$0.0233 per share. The impact of interest rates on FFO and AFFO remains a key question in the current investment climate.
At the end of Q1, Plaza Retail had approximately C$9M in cash and C$676M in liabilities, resulting in approximately C$667M in net financial liabilities. However, with assets and investments totaling around C$1.23B, the LTV ratio stands at approximately 54.5%.
Plaza Investor Relations
Investment Thesis
As of the end of Q1 2024, Plaza Retail’s book value per share was approximately C$4.95, trading at a discount of around 25% to its book value. The current dividend yield is approximately 7.6%, and although the distribution was not fully covered by the AFFO result in Q1 2024, I believe the full-year result will cover the distribution. Plaza Retail is attractive from an income perspective but the earnings multiple is not very low based on its AFFO performance.
Editor’s Note: This article discusses securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
