Calloway Real Estate Investment Trust

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I do not own this stock Calloway Real Estate Investment Trust (TSX-CWT.UN, OTC-CWYUF). In June 2009 I was looking at the dividend achievers list to find good stocks to review. This stock was on that this at that time. However, the problem with such lists is that the constituents of it can chance. This company stopped raising dividends in 2008 and in consequence is no longer on this list.

Because REITs give quite good dividend yields, you generally would expect the growth in dividends to be at or just above inflation. According to the Bank of Canada, Canada's inflation is running close to 1.5%. The dividend growth for this stock is at 0.37% and 3.35% per year over the past 5 and 10 years.

The current dividends are at a 6.27% yield with a stock price of $24.70. The 5 year median dividend yield is higher at 6.96%. The 5 year median Dividend Payout Ratio for AFFO is 94%. The 5 year DPR for cash flow is high at 102%. However, this has been coming down and the DPR for cash flow for 2012 was 84%.

Outstanding shares have increased by 7.5% and 36% per year over the past 5 and 10 years. Shares have increased due to stock options, DRIP, conversion of Debentures and exchange of deferred shares. Mitchell Goldhar, a director, owns 45% of the outstanding shares, including special voting shares (with 20 votes each) and all his shares are worth around $1.5B.

Revenue per Share, when looking at 5 year running averages has increased by 9.2% and 8% per year over the past 5 and 10 years. EPS seems to have increased a lot because it was up by 378% for 2012. This is probably because of the new accounting rules. The AFFO (Adjusted Funds from Operations) is not up by very much and this is generally how REITs are judged.

Even looking at the 5 year running averages for which I only have a 4 year growth, the AFFO is up by only 1.7% per year. This is a very low value. The FFO is not much better with 5 year running averages over the past 5 years up by only 2% per year. (Of course, the problem with FFO is that how it is calculated has changed over the years.)

The story is brighter if you look at what stockholders have earned over the past 5 and 10 years. The total return over the past 5 and 10 years is at 9.34% and 21.33% with 5.94% and 9.77% per year from distributions and 3.4% and 11.55% per year from capital gains.

According to the financial statements, the Liquidity Ratio is just 0.10. That means that the current assets come nowhere near the current liabilities. Even adding in cash flow after dividends, this value rises to just 0.13. However, you should also look at my remarks below on this subject. The Debt Ratio is very good at 2.26.

The stock price tests I can use for this REIT says the stock price is reasonable to cheap. The 10 year median Price/Book Value per Share Ratio is 1.54 and the current one is 1.01 a value some 65% lower. This test says the stock price is very low. This is based on a stock price of $24.70.

If you look at Price/AFFO Ratio, I get a 5 year median P/AFFO Ratio of 14.44 and a current ratio of 15.06, which is only 4% higher. The 5 year median Price/Cash Flow per Share is 15.52 and the current P/CF Ratio is 16.89, a value only 9% higher. (However, it is above the 5 year median high P/CF Ratio of 16.81.) The 5 year dividend yield is 6.96% and the current dividend yield is 6.27% a value only 10% higher. All these tests suggest that the stock price is in the reasonable range.

When I look at analysts' recommendations, I find Buy and Hold recommendations. Most of the recommendations are in the Hold category and the consensus would be a Hold. The 12 month consensus stock price is $28.60. This implies a total return of 22.06% with 6.27% from distributions and 15.76% from capital gains.

Zolmax has commented on a few analysts' rating changes for Calloway. I cannot find much in the way of comments on this stock except that one analyst feels that Calloway will again raise the distributions in 2014.

What I do not like about this stock is the complicated ownership structure. Sometimes it might be worth it for superior returns for the ordinary shareholder, but I do not see this happening here, especially at present. Although I must admit that over the past 10 years with a total return of 21.33% that the company is close to superior returns. However, this is not true over the past 5 year.

Also, the company's statements might be more complex than they originally appear. My general attitude is that if the accounting records are hard to understand, I do not want to invest. You got to ask yourself, what are they trying to hide?

For example, for current assets, G&M gets $239.86 and for current liabilities gets $100.28, for a Liquidity Ratio of 239. The Balance Sheet in the annual statements gives values of $38.8 and $120.6 for a Liquidity Ratio of 0.39. In the notes they do talk about other receivables, but I cannot replicate G&M figures and it is hard to tease out exactly what some of the notes mean. See G&M's site. Google Finance on their site get the same values as I do. Why invest in a company that makes it difficult for you to figure out their financial statements?

I do not like the complex ownership nor the not easy to decipher accounting. There are other REITs to buy. See my spreadsheet at cwt.htm.

Calloway REIT is the largest owner of large-format unenclosed retail properties in Canada. Its web site is here Calloway.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.